Weddings bring the romantic aspects of a couple’s relationship into the limelight, but it’s also important to give careful consideration to the pragmatic aspects of marriage before you walk down the aisle. Importantly, if you own a business, have you thought about putting measures into place to help ensure fair treatment of that business in the event of divorce?
No one wants to think about the possibility their marriage might end in divorce, but when it comes to the company you’ve painstakingly built, “better safe than sorry” can be a wise approach. Here are just a couple of examples to illustrate why:
- Say you divorce and in the settlement your spouse is awarded a large share of your company’s stock, which he or she then sells off. As a result, the stock value plummets. Or maybe you haven’t made provisions for paying your spouse for his or her share of the marital value of the business and you don’t have the funds to do so, so you’re forced either to sell the business or potentially bring him or her on as a partner. Think about the potential impact to you, your business and your partners, if you are a co-owner.
- Perhaps your spouse is already a partner or plays an important role on your company’s team. What kind of complications could ensue if you don’t have specific guidelines in place for how you will buy him or her out (or vice versa)? Will you be forced to either continue in your working relationship or dissolve the business?
Get it on paper! This is a good time to think all of this through, sit down with your lawyer and draft a plan. You and your spouse will both have the peace of mind of knowing that you agreed how things would be settled while you’re in a positive frame of mind rather than waiting until the contentious environment of a divorce proceeding.
A prenuptial agreement, or prenup, gives you an opportunity to set forth directives of how your business would be handled in the event of divorce. Your lawyer can help you determine what needs to be in this document; here are a few points to consider:
- Will the company you established prior to marriage be subject to marital distribution upon divorce, or will it remain your separate property (not subject to division)?
- Will your spouse share in any appreciation (or depreciation) of your business once you’re married? If yes, what percentage of the value accumulated during the marriage will apply?
- What is the premarital value of the business? Establishing its value today will be essential as a court determines premarital versus marital value.
- Will any marital funds be used as capital in the business?
- Does or will your spouse hold a position in the company? If so, this is a good time to specify the extent of that role and what impact, if any, it will have on how the value of the business will be distributed in a divorce.
- Will you be paying yourself fair market compensation, or do you intend to take a smaller income so you can reinvest funds in the business? If the latter, explain what this would mean in terms of distribution of assets.
- If both of you have an ownership interest in the business, will you each maintain that ownership upon divorce? If not, will you dissolve the company and divide the assets? Or will one of you buy the other out?
- What method will be used to determine the value of the business upon divorce?
If you aren’t able to put an agreement into place before the wedding, or if a notable financial event emerges after you’ve married—you buy into a business or invest in real estate, for example—a postnuptial agreement, or postnup, can cover many of the same key points included in a prenup.
Like a prenup, a postnup can clarify what each party is entitled to, and responsible for, in the event of divorce to ensure fairness to both. In addition to setting forth provisions about your business interests, it can also address circumstances that were not anticipated at the time of the prenup, such as what should happen if you relocate for your job and your spouse’s career prospects are adversely impacted by the move, or one of you leaves the workforce to become a primary caretaker for the children.
In short, a postnup enables you to address matters that you either didn’t address in a prenup or that have resulted from circumstances that have arisen during your marriage. Whether you choose to draft a postnup, a prenup or both, keep in mind that these can be uniquely tailored to include any conditions you and your marriage partner agree upon. The point is to clearly spell out what would happen in the event of divorce to minimize ambiguity in the moment, which is especially important when considering the potential damage to your business if you have not taken such precautions.