Is your small business divorce-proof?

On Behalf of | Feb 12, 2021 | Family Law |

At least 50% of Americans end up divorcing at some point, yet few draft prenuptial agreements that would protect their possessions and financial futures if they split. Even if some do, their prenup their prenup may not protect them from losing some of their most valuable assets, like their small business, if they divorce.

Why it matters whether you included the business in the prenup

It’s not uncommon for spouses to lose a portion of their small business if they divorce. This result often happens when a spouse hasn’t yet incorporated their business or doesn’t see it as profitable enough to include in a prenup. Any profits that a spouse’s company generates after their marriage are likely to fall under the umbrella of marital assets should they divorce.

Why it matters what happens with the business’s profits

There’s no guarantee that a spouse will be able to leave their marriage with their business intact, even if they do incorporate it and include it in a prenup. It all comes down to what happens with the profits it generates.

If they use them to pay for their expenses alone, then their business is likely to remain solely theirs. They may commingle their assets when they use the business’s profits to cover joint expenses such as the mortgage. A husband or wife who didn’t initially own the company may then have a valid ownership stake in it.

What if you don’t have a prenup?

If you didn’t get a prenup and you’re hoping not to have to turn over a portion of your company to your spouse when you divorce, then determine whether your corporate by-laws contain a lock-out clause. You and your business associates may be required to seek each other’s expressed consent to transfer your company’s shares or voting rights if your buy-sell, partnership, shareholder or limited liability company (LLC) agreement contains such a clause.

You may think that you don’t have any option but to give rights to your business to your spouse if there’s no prenup or lock-out clause in place. A family law attorney may be able to help you negotiate an alternate property division option that will be less impactful to your business.

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