According to information from the American Small Business Administration, 90% of the country's businesses are family-owned. With the current divorce rate at around 50%, many family companies are put at risk because of asset division in times of divorce.
Because California has community property laws, any money earned during a marriage is counted as a shared asset. Even a business started before a marriage can have its profits divided with the other spouse, according to the company's growth during the union.
Because these laws create complex situations, many of California's business owners want to know how they can protect their interests. In this guide, you'll learn how to divorce-proof your business.
Create a Prenuptial Agreement
Also known as a premarital agreement, a prenuptial agreement or "prenup" works similarly to a partnership contract for the formation of a business. To protect a business after a divorce with a prenup, both parties will detail what they own and how community assets will be divided. An effective premarital agreement is:
Made far in advance of the wedding, while both parties are free of coercion and of sound mind
Signed in front of a notary or several witnesses
Created with full disclosure of financial plans, holdings, and assets
Not unfair to either party
The failure to meet these criteria may invalidate the agreement, or, at the least, put it under suspicion. Protect your agreement by having your attorney add a clause that upholds it even if some parts are invalidated by either spouse's actions.
This prevents the addition of vague language or hard-to-enforce stipulations. It's possible to make a post-nuptial agreement, but these aren't as airtight because the stakes change once a marriage has been finalized.
Keep Your Marriage Separate From Your Business
Much like prenups, business charters may reflect the owner's assets if the situation becomes complicated. Forming a corporation or limited liability company (LLC) to keep business and personal holdings separate is one of the simplest ways you can protect yourself. A partnership agreement may also include provisions for members to perform buyouts to protect the remainder of the company.
It's important to remember that, just like a premarital agreement, a partnership agreement may be invalidated if the partners don't follow the document's provisions. Additionally, if assets are bought via personal accounts, the line between personal and business assets gets blurry, and the entire agreement may be invalidated.
Business charters should be carefully reviewed by a contract and family law attorney, and you, as a business owner, should diligently track your expenses and keep firm boundaries between personal and business assets.
Reaching an Agreement
Even if the company falls firmly into the 'community assets' category, you can still take steps to hold everything together. While California's laws generally split joint assets evenly, they don't require spouses to divide every asset that way. In other words, it's possible to use tradeoffs to pay the business' equivalent value without having to sell it off or divide it.
Your divorce attorney may suggest raising the necessary capital via employee stock ownership plans. Alternatively, an owner could put the company into a trust to prevent its assets from being divided in a divorce. Finally, it's best not to put all your earnings back into your company, as they'll be harder to keep separate. Rather, you should pay yourself a commensurate salary.
Consult a California Divorce Attorney
Generally, preparing for a divorce with clear contract language, a full disclosure of assets, and diligent accounting will make it easier to answer questions during the process. It's vital to know that debt is also shared just like assets are, so even if you've got no interest in the company's earnings, you should still protect yourself.
Although divorce is not a “one size fits all” process, taking the steps listed here will help to ensure your assets, rights, and business are protected in times of divorce. You can find out more about divorce-proofing your business, keeping business and private assets separate, and resolving disputes by consulting an experienced family law attorney.
Contact Law Offices of Donald P. Schweitzer at |F:P:Site:Phone} to discuss your case today.