Couples go into both marriage and business together with high hopes. But the reality is that about half of marriages end in divorce – and if soon-to-be-exes are in business together, that can be a problem.
Richard Martin, an attorney with Springfield, Mass.-based MassMutual Financial Group, who specializes in small business planning, urges couples to take steps early on to “divorce-proof” their business.
He suggests having a financial advisor walk them through their options and suggest documentation that will help protect both spouses from unforeseen circumstances down the road.
Here are five more ways to divorce-proof your business:
Setting up your business as a sole proprietorship could leave it vulnerable to future problems. Even if one spouse stayed at home raising the children, the ex-spouse is entitled to a share of the business – often as much as half.
Therefore, Martin recommends operating agreements, partnerships or shareholder agreements to include provisions that would protect the interests of other owners if one owner gets divorced.
By prohibiting the transfer of shares without the approval of the other partners or shareholders – and establishing their right to purchase the shares or interest of divorcing parties – the other owners are more likely to maintain their control of the business.
In a pre-nup, couples may decide in advance what portion of their business is considered separate property and what’s considered marital property in the event of a divorce. For jointly owned mom-and-pops, a pre-nup can establish from the outset a 50-50 distribution of business interest to each spouse.
Like a pre-nup, a postnuptial agreement helps couples establish which portion of the business they own if they become business partners after getting married and don’t have a pre-nup.
Even with a pre-nup, it’s important to have a buy-sell agreement. This enables mom-and-pops to agree to a formula early on for establishing the value of their business at any point in the future in the event of a divorce, death or disability.
It also protects any partners from the spouse of a divorcing partner. Otherwise, the courts could allow the spouse to become a partner against their will, potentially dooming the business.
Trusts can also help protect your business assets. You could create, for example, a domestic asset protection trust in Nevada, Rhode Island, Alaska or Delaware. These are trusts that protect assets from creditors, including future spouses. You can also name yourself as a potential beneficiary. Just keep in mind that each state has different rules regarding the trusts. Even if you’re not located in one of those states, Martin says, it’s a means of protecting your business assets against creditors in a divorce. By creating one, you’ll be protecting your partners’ assets, as well.
Reprinted with permission from NFIB.com. Copyright National Federation of Independent Business, 2013; all rights reserved.