How to Keep Your Ex From Taking Your Business in a Divorce
Tips for Keeping Your Business Safe in a Divorce
If you are one of the millions of Americans who are running their own business, it’s important to handle your finances thoughtfully. In the event of a divorce, you could end up with your ex-spouse demanding part of your business. Here are a few strategies that can help avoid any confusion before or after divorce.
Create a Prenuptial or Postnuptial Agreement
One of the best possible things you can do to prevent your spouse from taking your company in a divorce is to create a prenuptial agreement. It is very common for people to create prenuptial agreements that specify their future spouse will not have a share of the business in the event of a divorce. Even if you didn’t remember to do this before your marriage, it’s not too late. You can talk to your partner about creating a postnuptial agreement if you would like a little more security. Postnuptial agreements are often invalidated in a divorce, but it can still be a valuable way of proving both parties’ intentions during a later argument about asset division.
In any prenup or postnup, the main goal is to be as fair as possible. The court always has the option of throwing out this sort of agreement if they feel it unfairly benefits one party. To reduce the risk of your agreement being dismissed, follow these tips:
- Ensure both people involved have their own separate lawyers.
- Don’t try to get a spouse to sign the agreement right before a marriage, birth, or another big event. This can be viewed as placing undue pressure on them.
- Don’t make a prenup that leaves one spouse destitute or prevents them from getting compensation for what they put into the marriage.
- Avoid any clauses that attempt to “punish” a spouse for extramarital affairs or other bad behavior.
- Be honest in the document and avoid hiding any assets or making other misleading statements.
Set Up Your Business as an LLC or Corporation
A lot of the confusion about who gets a business in divorce happens because it is tough to tell whether the business assets are personal assets or not. A limited liability company (LLC) is a useful tool that legally specifies your company is a separate entity from you. For most business owners, an LLC is the most useful business entity, but some may want to create an S corporation or other similar arrangement. The main thing is just to have some clear, legal way of defining that the company isn’t part of your personal savings or other private finances.
Keep in mind that an LLC or other business entity isn’t a foolproof method of keeping your ex from taking part of your company. It is merely a tool for helping to keep your finances separate. Your business could still count as marital property in the following situations:
- You created the LLC after marriage
- You invested marital property into the LLC
- Your spouse contributed time or money to the LLC
- The LLC names your spouse as a co-owner
In these sorts of situations, you might end up losing some control of your company following the divorce. To keep this from happening, it is a good idea to consult with legal and financial advisors when you first set up the company and talk to a divorce attorney if you are getting a divorce.
Don’t Mix Up Personal and Business Finances
One of the absolutely most important things is to avoid combining your business and personal finances. Doing so makes everything far more complicated. If the court cannot tell what money belongs to the business and what money was you and your partner’s savings, they might require you to just divide the whole thing with your ex. Here are a few examples of the types of things you need to avoid doing:
- Paying utilities for both your home and the company from the same account
- Depositing customer payments into your personal savings account
- Borrowing money from your joint checking account to cover a shortage in payroll
- Using you and your partner’s credit card to purchase supplies for your company
- Paying for a personal vacation with the company credit card
Instead of mixing up all your finances, try to keep everything as separate and easy-to-understand as possible. Make sure that you have two separate bank accounts that are used to handle your business and personal finances. Use the business account for all supplies, payroll, savings, profit, and other finances associated with your business. Only transfer funds to your personal account if they are part of the salary you pay yourself to run the company. Keep a careful record of all business expenses and profit to show that your personal finances are not involved in any way.
Avoid Involving Your Spouse in the Business
Intermingled finances aren’t the only reason people end up dividing a business in a divorce. The other reason that a spouse might get part of your company is if the court feels they deserve it. When one partner has put a lot of effort into supporting their other partner, the court might decide the person deserves to be compensated with a share of the business.
If you don’t want this to happen, it might be wise to keep your marital relationship and your business life separate. Make sure to fairly compensate your spouse the market rate if they do anything for the company. This ensures they are viewed as a previously compensated employee, not a partner who deserves a share. Keep in mind that a variety of actions can count as spousal involvement, including:
- Your spouse is an accountant who regularly looks over your company’s finances for you.
- Your spouse contributed to the design and manufacturing of the product your company sells.
- Your spouse took care of all childcare or living expenses, so you could focus on starting your company.
- Your spouse gave you some of their funds as an investment in the company.
- Your spouse worked at the company unpaid for any sort of task, ranging from cleaning the building to working a desk job.
Be Creative When Resolving Financial Disputes During Divorce
If you have a company, it’s important to be as flexible as possible in a divorce. The last thing you want is to reach a stalemate, go before the court, and end up being ordered to give your ex part of your business. Instead, it is a good idea to create some clearly defined priorities. For example, you could give your ex a savings account that is worth more than the valuation of your company in exchange for you holding onto your business that’s showing a lot of promising growth.
At the Law Office of Kelly Berton Rocco, we work hard to help you come up with the best divorce arrangement possible. Our team can help mediate discussions with your spouse, so you can find a mutually satisfactory agreement, or if a compromise is impossible, our divorce attorneys can assist you with pleading your case in court. We are located in Hackensack and provide family law services throughout the surrounding counties. If you would like to learn more about our team, call 201-343-0078 or send us a message now.