How To Protect Business Interests With A Prenuptial Agreement
When starting or investing in a business, there is no shortage of advice on how to protect yourself: form an entity that shields your personal assets, purchase general and professional liability insurance, be prudent in not mixing personal and business finances.
Yet many business professionals don't realize how much risk they take on by not having a prenuptial agreement. How can a prenup protect your business interests? Continue reading to uncover the answers to your questions and to learn more about protecting the future of your business investments.
Why Protect My Business In Marriage?
In a divorce, courts divide marital assets and debts between you and your partner. Whether that means awarding your ex-spouse half the fair market value or a share of the sale proceeds, your business interests will likely be divided in a divorce.
Regardless of when you started your business—before or during marriage—your spouse will likely have a right to participate in the business's appreciation during the years you were married. A court will see this increase in value as partly attributable to your marriage and to your spouse.
Say you left for work every day for a decade while your partner sacrificed a potential career to stay home and take care of the kids. Or your spouse contributed behind the scenes as your sounding board or brainstorming partner. There are countless ways a court sees a marriage as contributing financially or otherwise to a person's career and business success, and they're prone to award the non-business spouse a share in the profits upon divorce.
How Can A Prenup Protect My Business Interests?
A prenuptial agreement allows you to categorize your assets as separate property or marital property. You and your future spouse get to predetermine how your assets and debts will be distributed in the event of a divorce. Imagine the headaches, confusion and legal expenses you can avoid by having these conversations now as opposed to during a divorce when you're less likely to negotiate harmoniously.
In your prenup, classifying your present and future business interests as separate property can protect them from being divided in a divorce. You can also categorize intellectual property as separate property and include a confidentiality clause to prevent your partner from sharing or using your trade secrets and privileged information against you or in competition with your business.
If you're in a situation where you and your spouse started a business together, a prenup will allow you both to clarify the responsibilities and protocol should a divorce happen in the future and help ensure your company continues to run smoothly throughout the process.
How Do Courts Divide Property Without A Prenup?
States apply one of two distinct approaches when dividing marital property in a divorce: community property and equitable distribution.
Community Property: In the United States, only nine states apply community property law. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, everything acquired during marriage is assumed to be community property and is generally divided equally regardless of who earned the property.
Property acquired before marriage or during the marriage as inheritance, gift or personal injury settlement is classified as separate property and is usually safe from distribution.
Equitable Distribution: Alternatively, states that follow equitable distribution attempt to divide assets and debts fairly (and not always 50/50) based on the circumstances. These states take a deeper look into the facts of the marriage, such as who earned the assets, who incurred the debt and the length of the marriage.
What Other Topics Should I Consider When Protecting My Business Interests?
There are many areas in which your business interests could suffer if not adequately protected beforehand. Here are some additional areas where your business might be vulnerable:
If you're hoping to sell your company, buyers want to see a clear chain of title. If ownership shares in your company are split with your ex-spouse, this could muddy the waters and make the purchase of your business less appealing. Moreover, if you're tied up in a divorce litigation, aspects of your company might be affected; this could make your entity, along with its financial stability and valuation, appear risky.
It is critical for any business that its shareholders and members have the ability to vote and manage the entity free from outside influence. If your shares and voting rights are split with your ex-spouse during a divorce, your ex-spouse might become an unwanted partner with influence over the trajectory of the business.
If you're stuck in a situation where your ex-spouse is about to receive voting rights in your company, you could offer to buy them out. Of course, this could significantly alter the cash flow of your business or deplete your personal finances. Depending on your partner's willingness to find a solution, there are ways around sacrificing control of your business; they just might be pricey.
Your company's governing documents (i.e., bylaws, operating and partnership agreements) should address the issues discussed above. For example, your operating agreement can limit a future ex-spouse to a financial payout with no voting or control rights. The language in your governing documents should align with the terms of your prenuptial agreement.
Conclusion
Entering a lifetime commitment through marriage is similar to entering a business partnership minus the romantic aspect, of course. You are merging your life with someone else's. You wouldn't invest in a business without having an agreement in place to outline the expectations of the parties involved. It stands to reason that you and your future life partner could similarly benefit from an agreement clarifying financial expectations and how you might divide assets and debts in the future.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
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