Entrepreneurs don’t think about their marriage when they start a business. The mind of an entrepreneur is split in a million directions trying to find the right path to success, market, build revenue and a zillion other things.
But when entrepreneurs get married, they may be putting their business at the biggest risk yet.
Divorce has the potential to cripple a business. There’s also the “I started the business before I was married, so it’s mine” fallacy. Marital property can include the appreciation value of the business during the time you were married.
- Tommy’s business is worth $100,000 when he marries Stacey
- Stacey and Tommy divorce 10 years later
- Tommy’s business is worth $10 million at the time of divorce
This is a realistic scenario for many viable businesses, and even though Tommy’s business was just getting started when he married, it is now $9.9 million more valuable. Stacey can demand her split of the appreciation value.
Most businesses could not afford to lose half of their value in a divorce.
Prenuptial agreements can be drafted in such a way that your business is safeguarded against divorce.
1. Appreciation is Separate Property
Premarital assets are defined as separate or marital at the time of signing an agreement. When you discuss your agreement with a lawyer, ask the lawyer to draft a prenup that considers assets that may rise in appreciation during the marriage.
Businesses characterized as separate property and that are agreed will retain their pre-martial character will be protected from the appreciation split.
Your ex may still argue and fight for the appreciation value, and it’s up to the court to decide what to do in this case. In most cases, the prenup will hold up in court and the business will not suffer any lasting hardships as a result.
Note: Businesses aren’t the only asset that can gain appreciation. Family heirlooms and collectables need to be safeguarded, too.
2. Require Shareholders to have a Prenuptial Agreement
Partnerships or businesses with multiple members may require a prenuptial agreement be signed in the operating agreement. This stringent requirement helps protect the business from outside threats. A good example of this would be:
- Tommy’s business has 2 other owners
- When he divorces Stacey, she is granted 50% of Tommy’s share of the business
Now, Tommy has less bargaining power in the business and loses his authority over the business. Stacey may choose to become part of the business’s operations, pushing for changes that don’t fit well into the business.
In the event Tommy died before the divorce, Stacey may have all of Tommy’s share in the business, which may even make her majority owner.
Operating agreements may also require that any shares in the business, passed to the spouse of a shareholder, be approved by all shareholders.
What this clause does is ensure that before an outside party gains interest in the business, there is some form of approval that can lead to a different arrangement as needed.
Shareholder buyout agreements may be implemented that allow shareholders to buy out another party’s interest in the company.
3. Prenups Force Separation of Business Practices
While your prenup may now actually force you to separate your business practices from personal life, it does make you think more strategically when intermingling your assets and making business decisions. Even a prenup has its limitations, and even an ironclad prenup may be weakened by the decisions you make.
For example, say your business was facing bankruptcy and your spouse stepped in and saved the business, or your spouse worked at the business to get operations back to profitability.
When this occurs, this weakens your prenup. A judge may find that the business only found success because or your ex. The character of the business may change when assets, given by your spouse, enter the business.
In fact, this may change the character of the business to a marital asset.
If possible, it’s vital to keep all martial assets out of the business.
Something that couples tend to overlook is the assets, non-business assets, that they own and may become the property of their ex. A good example of this would be a family heirloom, such as a precious diamond.
Your ex may ask for the diamond, and if it’s not part of the agreement, it may be granted to your ex.
Even though you were planning on the heirloom to be passed down to your children or other family members, there’s a chance that it will be sold and never seen again. This is a family business affair, and a prenup may be enough to safeguard these assets, too.
Your prenup will help you provide the inheritance your kids deserve instead of losing many or these items when divorce hits. Prenups help couples strengthen their marriage and help circumvent an otherwise nasty divorce.