Without a premarital agreement, your business could be at stake in a divorce. Here's how to minimize that risk.
According to research published in the New York Times, the U.S. divorce rate peaked at about 40 percent in the 1970s and early 1980s but has since steadily declined. While it's difficult to calculate an exact overall divorce rate due to contributing factors including age at marriage, race, socioeconomic level and religion, it's nice to know that if current trends continue, roughly 66 percent of couples will never have to endure the anguish of divorce. But that leaves 34 percent who will. Divorce isn't something we anticipate when we fall in love, get engaged and marry. As entrepreneurs, however, it is something for which we should plan. Though it's not always obvious, your assets, income and business interests are at risk during a divorce. Protecting these assets is an important step in the divorce process. If mistakes are made, it could result in serious financial and personal consequences.
If you own a business, protect your interest from the outset with a premarital agreement. Spell out your pre-existing business assets and have your spouse waive any claim in the future, regardless of the business's appreciation in value. If you are already in the process of divorce and did not execute a premarital agreement, or if you started your business during the marriage, then the business may be in play. An experienced family law advisor can develop strategies to minimize your exposure.
Start by assessing the level of your spouse's involvement in your business. A spouse who lacks involvement has a reduced claim to the business value. It is best if your spouse is not an employee, does not contribute to the business's management, and does not provide ideas or business innovation advice. If you are still in the pre-divorce stage, start to document your spouse's lack of involvement in your business.
Review your options for establishing a buy-sell agreement, corporation, LLC, or a living trust to restrict ownership and ownership transfer. If you have business partners, revise your partnership agreement to require that the other partners have the option to buy out the interests of the divorcing partner and his or her spouse. You may still have to compensate your spouse for his or her share of your business's value, but this way you can prevent your spouse from becoming part owner. Yes, that can happen.
Even if you haven't established any legal protection to secure your business interests, it helps if you have carefully established, funded, and managed your business with separate assets. Avoid co-mingling business assets with personal assets and business accounts with personal accounts. Pay yourself a market-rate salary. When you reinvest all or most of the business revenue back into the business, your spouse may claim he or she deserves the benefit of the appreciation in value.
If a business is at issue in the divorce, then a value must be placed on the business. The simplest and cheapest way to establish business value would be to agree on a number you both can live with. If you cannot agree on an arbitrary value, the next best cost-effective method is to ask the company accountant to determine the "book value" of the business.
Book value is the accounting value of the business, which usually does not reflect the true market value. The difference between market value and book value can depend on factors such as the specific industry, the nature of a company's assets and liabilities, and the company's specific attributes. If you want to assess the business's market value, you have to hire a forensic accountant. Choose an expert who can minimize the value of the business while conducting an evaluation based on standard guidelines. Once value is agreed upon, consider how to distribute it to your spouse―by cash payment, by an offset against other assets you will waive, or with installment payments.
Now let's look at the flipside. What if your spouse owns a business and you believe you should receive a share of that business's value?The advice is the same, but in reverse. Carefully document all the work, ideas and resources you contributed to the business. You may have done work for the business without drawing a paycheck, or engaged in social activities to woo clients, worked the register, created marketing materials, managed social media accounts, performed bookkeeping and recordkeeping, or made other contributions. Document everything you have done to help the business.
If you're an entrepreneur who's considering--or in the midst of--a divorce, your business can generate complicated legal issues. Choose a family law specialist with a background in business transactions to assure that your business is properly evaluated and distributed.
Rosanne DeTorres is the managing partner and co-founder of DeTorres & DeGeorge Family Law.
Please Note: The views and opinions expressed here are those of the authors and do not necessarily reflect the position of the Morris County Chamber of Commerce.
Morris County Chamber of Commerce
325 Columbia Turnpike - Suite 101
Florham Park, NJ 07932 (MAP)
Our Mission: The Morris County Chamber of Commerce collaboratively advances the interests of its members to champion a thriving business and community environment.
Our Vision: Creating member experiences that foster exceptional business success and quality of life.