Divorce is usually difficult to deal with. The business suffers as it undergoes intense scrutiny on how much it is worth. The maximum production that it can reach and whether it is possible to exceed its current production rate. The valuing process of the business involves high stakes as the results are considerably influential during the discussions.
Tread carefully if your intention is to protect the business before a divorce. If it is detected that there are changes in shareholding or movement of assets in an attempt to avoid future claims, then that will considerably damage your case. The courts are empowered to set aside the transactions intended to achieve this. However, three broad principles can prevent your business from getting torn into several pieces during the divorce.
3 Ways You can Protect Business Assets in Divorce
1. Prenuptial agreement and Postnuptial Agreement
Prenuptial and Postnuptial agreements are helpful in minimizing claims on the business, and a divorce lawyer can help you set this up. It may not appear as the most romantic thing to do especially when the couple is dating, but it helps in setting financial expectations. If this agreement is not in place, then the future of the business may be at stake. Planning ahead and getting your partner to agree to the terms of the agreement before marriage or subsequently (for example when receiving an inheritance) helps avoid damaging claims that may well destroy the business.
A prenuptial or post-nuptial agreement gives each partner the opportunity to determine what portion of the firm they claim as marital property. The part set aside as separate property is protected from claims. In most of the places around the world, marital property is subject to a 50/50 split. If the firm is established in the course of the marriage, then it is not safe from damaging claims that lead to its dissolution unless such an agreement is in place.
2. Think About a Trust or Corporation
If you are a sole business owner, you may want to consider forming a Limited Liability Company (LLC) or a corporation. It is usually best when incorporation is done before marriage.
The idea behind incorporation is that the business becomes a separate legal entity. What that means is it can sue and be sued in its own right. However, you should note that any asset belonging to the marriage ad used to pay business expenses may be used to determine that the firm is actually community property.
Furthermore, shared ownership of the enterprise with the outsiders is a plus in case of a divorce. If the enterprise is fully owned by the spouse, then it will be subject to division unless there is a compelling reason not to. If the business is jointly owned with others through a partnership or shareholding, then the court is unlikely to act and ruin the livelihood of others owning a part of the business.
In that regard, it is best to separate private assets from business assets. Keeping the business away from personal wealth helps substantially in protecting the business from claims following a divorce. In any case, choosing to involve your partner on business matters is not always good. Eventually, they may turn around and claim that they contributed to its success and so is part of the property to be split.
Another viable option to consider is placing your business and its assets in a living trust. What that means is that the firm is placed under the control of a third-party entity legally empowered to own the firm for the benefit of the client. However, there is one drawback. While trust can typically act as a safeguard against the division of the asset, it can still be used in alimony calculation.
3. Maintain a Healthy Working Relationship
In most cases, it is hard to completely keep your ex-spouse from the business. Therefore, the best way to ensure the continuity of the business is to maintain a healthy relationship. Honesty regarding mutual interests on the business goes a long and ensures business continuity.
It is also good to agree on having separate legal representatives during the divorce so that the interests of each in the business are safeguarded sufficiently. This also prevents a situation where an action of one party is regarded as betrayal.
Your business does not have not have to end following separation. You can protect business assets in divorce by acting smart and drawing an agreement that protects your business in the event of a breakup. Also, it is a good idea to share ownership of the business with outsiders. Finally, ending the marriage does not mean that the business has to end. You can both agree to keep the business running for the benefit of both of you.