Protecting Your Business During a Divorce Takes Foresight, Planning
Business owners: It is possible to protect your business during a divorce. However, you are most likely to be successful in doing so if you adequately prepare.
August 05, 2012
Most everyone who gets married does not intend for that relationship to dissolve in the future. Unfortunately, divorce affects over half of married couples. Without foresight and a plan, family businesses may be sold wholesale or in part during divorce proceedings. It is imperative that business owners take legal precautions before they marry to protect their businesses in the otherwise unplanned event of divorce.How Divorce Affects Your Business
When couples divorce, all marital property--the income and assets obtained during the marriage by either spouse--is split between them. Since businesses are considered assets, business owners may have to sell part of all of their company as an asset in divorce proceedings.
The state of California is a community property state, which means that all marital property is split 50-50 during divorce. However, it may be possible to avoid splitting a business 50-50 if business owners take a few prudent steps before they marry.
How to Protect Your Business During Divorce Proceedings
Though discussing what will happen in the event of a divorce is difficult for newlyweds-to-be, it is one of the most important things business owners can do to protect their businesses. Three documents offer particularly effective protection for businesses during divorce proceedings: prenuptial agreements, postnuptial agreements and buy-sell agreements.
Prenuptial agreements are legal contracts drafted before a marriage that identify how spouses expect property to be divided in the event of a divorce. Well-drafted prenuptial agreements are negotiated by spouses and their lawyers, written and signed, drafted voluntarily and under full disclosure. Prenuptial agreements often override the 50-50 split rule in community property states like California since courts respect the document as the wish of both spouses.
If couples marry without first signing a prenuptial agreement, it is possible to draft a postnuptial agreement. Postnuptial agreements work like prenuptial agreements; however, postnuptial agreements are more likely to be challenged in court because of the rights given to spouses after they marry, like the expectations for property division and the couple's fiduciary relationship.
Finally, a buy-sell agreement may be the best fit for spouses that both have a stake in the business. A buy-sell agreement between spouses works like a buy-sell agreement between unrelated business partners. It outlines what happens in the event that one of the partners leaves the business. These types of agreements are typically based on stock in the business. When one spouse leaves, his or her share is sold back to the other spouse.
How Business Valuations Affect Divorce
To determine their worth in a divorce, businesses must be valued. Business appraisers, certified public accountants, financial analysts and business brokers can all help business owners value their company. The appraisal will value the business based on its past and future earnings, assets and liabilities. This value is used to settle with a spouse in a divorce. Extending the settlement payments over a number of years may help business owners avoid executing a single large cash distribution that may negatively affect business finances.
Though no one who is happily engaged or married wants to discuss divorce proceedings with his or her spouse, doing so helps make sure businesses are able to weather divorce proceedings and avoid being sold off.
Article provided by Stolar & Associates, A Professional Law Corporation
Visit us at http://www.stolar-law.com/