How Can You Protect Your Business During a Divorce?
Although divorce can be an emotionally difficult time, there are always factors that can exacerbate it. Custody, savings, and property, to name a few, present common obstacles that have to be hurdled before a breath can be taken and healing begins. Business owners experience an added element that is often disheartening and financially debilitating.
What to do with your business when divorce has entered the picture is the question for which there is no easy answer. If you had a prenuptial agreement that outlined a ‘just-in-case’ scenario, you are definitely ahead of the game, albeit circumstances change and a spouse might eventually challenge you. On the other hand, having no prenuptial agreement most often leaves both spouses scratching their heads.
There are different circumstances that are present when a business becomes the centerpiece of a divorce. Some businesses are started by both spouses before or after the onset of the marriage. Some businesses were started by one spouse before the onset of the marriage, but the other spouse has since contributed to the business. It is also not uncommon for a business to have been started before the onset of the marriage by one spouse with the other spouse never contributing at all.
Despite what the particulars of a business are when going through divorce, the terms deciding how a business is going to be settled or divided seldom turn out the way business owners expect. There are many factors involved that determine the outcome of settling a business during a divorce. Thus, it is always helpful to have a basic understanding of how a business is affected by a divorce, who benefits, and who comes up short.
How Are Property and Assets Generally Divided in a Divorce?
To begin, it is important to understand that divorce decisions made by a court are fundamentally based on whether a state is a community property or common law state.
A community property state is where assets acquired from the onset of the marriage are community property, with each spouse owning half. This goes for income earned by either spouse. Anything acquired before the marriage is deemed separate and remains with the spouse who acquired it. A common law marriage state is simply where the assets belong to whoever acquired them. A couple can still agree, of course, on a 50/50 split of any or all assets.
There are nine community property states, and Pennsylvania and New Jersey are not among them. Nevertheless, both Pennsylvania and New Jersey are equitable distribution states. Although the divorce laws between the two states vary, there are some common denominators. Both states decide on what is considered fair, and that is where things become confusing.
Although neither state is a community property state, both states assert that anything acquired during the marriage is marital property, unless, of course, the asset was acquired with money earned before the marriage. It is important to understand that an asset acquired during a marriage does not mean that it will be split equally, and that is where fairness comes into play via equity that is decided by the court.
How Is Your Business Divided in an Equal Distribution State?
Just as with any asset, if the business was started by one spouse before the marriage, it should remain the sole property of that spouse, but there are factors involved, as there always are. If your business has grown considerably during the marriage, your spouse may be entitled to a portion of the business or a cash settlement.
If a spouse has joined you in the running of the business since the onset of the marriage, or if a spouse has contributed ideas or schemes that have contributed to the growth of the business, that spouse may be entitled to a portion or a cash settlement. If the business is a partnership, remember that the business may not be split 50/50 but according to fairness, sometimes determined simply by needs.
Always bear in mind, of course, that if you are the sole owner of the business, and alimony or child support is in question, your salary from the business can easily be based on the company’s worth. In other words, if you have never raised your salary during the growth of the business, your alimony may be set according to the adjusted growth.
What Could You Do to Protect Your Business?
A prenuptial or postnuptial agreement is a safe way to protect your business. A prenuptial is an agreement that is made before the onset of a marriage, and a postnuptial is an agreement that is made after the onset of a marriage. Both are an agreement that will determine how the business is addressed heading into a divorce. The agreement can offer terms for how to value the business, how to divide its assets, or whether or not the business will be considered marital property at all.
If no formal agreement is made, there are still other ways to protect your business during a divorce. Make sure that you clearly define yourself as the sole proprietor of the business, and that you spell out that the business cannot be transferred if a divorce were to take place. A cash settlement in this case could be granted to the spouse, but your business will remain safely in your hands.
Keep good, clear records of all financial transactions. If no money from the marriage was used, make sure that your records indicate it. Make sure that you keep your income straight. For instance, if you are running up personal expenses through your business, they could be added as income and can affect the outcome of a settlement or alimony. Also, keep your assets transparent, a valuation that shows your business is worth considerably more than what you have listed could result in unfavorable consequences.
If your spouse is not a co-owner but works as an employee, make sure to pay a fair and equitable salary. Doing otherwise could lead toward that spouse filing for a greater settlement amount or lost wages.
It is also worth considering creating other protective measures, such as a shareholder, partnership, or buy-sell agreement. Contracts such as these can protect an owner in a variety of ways. For instance, you can prohibit the transfer of shares that do not have the approval of other partners. You can also set up a right to purchase shares agreement that will transfer control to other partners should one partner be involved in a divorce.
Marlton Divorce Lawyers at Goldstein & Mignogna, P.A. Help Business Owners Protect Their Business in the Event of a Divorce.
A divorce can decimate a business and bring unbearable financial and emotional hardship to one or both spouses. For an experienced attorney that will represent your best interests and alleviate the pain of a complicated divorce, speak with our Marlton divorce lawyers at Goldstein & Mignogna, P.A. Call us at 856-890-9400 or contact us online for a consultation. Located in Marlton, New Jersey, we serve clients throughout South Jersey, including Burlington County, Camden County, and Gloucester County.