No one goes into a marriage with the intention of getting a divorce. Unfortunately, more than half of first marriages and nearly 70% of second and third marriages end in divorce. Divorce is hard on any couple, but it becomes even more difficult if one or both spouses own a business.
It’s a safe bet that your business is the most valuable resource you have, so how can you protect it during a divorce? There are several ways, and some will require you to act ahead of the divorce – or the wedding itself.
Prenuptial Agreements
A prenuptial agreement may be one of the most effective ways to protect your business and its assets during a divorce. This agreement is, in essence, a contract signed by both you and your soon-to-be spouse that details the expectations and property rights of each party upon divorce.
When a prenup is well drafted, it can easily trump state laws on community property and equitable distribution. Typically, courts respect these agreements, which make them a powerful tool to protect your business.
Although powerful, prenuptial agreements can also be tricky, which is why it’s important to ensure that it’s well drafted. Ideally, each spouse would be represented by his or her own attorney to strengthen the agreement.
When drafting a prenup:
- There should be full disclosure, meaning that neither spouse should hide assets. If assets are hidden and left out of the agreement, this can invalidate the agreement and render it useless in court.
- The agreement can’t be unconscionable. If your business is bringing in millions of dollars per year, you cannot expect to get away with giving your spouse nothing in the divorce.
- The agreement must be executed by both parties. Ideally, this would occur in front of witnesses or a notary.
But if you’re already headed for divorce, a prenup will not benefit you. This type of agreement must be signed before the wedding takes place. If you do not have a prenuptial agreement in place, you do have the option of signing a postnuptial agreement. Just keep in mind that these are not quite as powerful as a prenup.
Use a Shareholder, Partnership or Buy-Sell Agreement
The operating agreements for your business should include provisions that protect the interests of the owners in case of divorce. These provisions may include:
- The requirement of all non-married shareholders to provide a prenuptial agreement to the company before the marriage along with a waiver signed by the soon-to-be spouse of his or her interest in the company.
- A provision that prohibits the transfer of company shares without first gaining approval from shareholders and partners. This provision may also give shareholders or partners the right to purchase the shares of one or both divorcing parties to maintain control of the business.
Protecting your business during divorce can be a tricky task, especially if you did not take proactive steps before the marriage. A divorce lawyer can help you determine the best course of action to take when protecting your business.
The Micklin Law Group, LLC is a New Jersey law firm specializing in Family Law and High-Asset Divorce. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. To set up a consultation, call 973-562-0100.