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How Will Divorce Affect Your Small Business?

Divorce can be a complicated, messy affair, but things can get even more complicated when a business is involved. There’s a good chance that your business is the most valuable asset you own. You’ve worked hard to build your company, and now, you worry that it may fall to pieces after your divorce.

There’s no doubt that your divorce will affect your business, but to what degree? That depends on a number of factors.

Is There a Prenuptial Agreement in Place?

If your business was already up and running at the time of your marriage, you may have had your spouse sign a prenuptial agreement. While not always ironclad, a prenuptial agreement may allow you to retain ownership of the business.

The biggest issue divorcing business owners run into is their prenuptial agreements are deemed invalid. For a prenup to be considered valid, it must meet the following requirements:

  • Must be signed willingly by both parties. If either party is believed to have signed the agreement under coercion, duress or fraudulent pretenses, it may be found to be invalid. Prenuptial agreements must also be notarized. Most states will require each spouse to have a copy of the agreement for a certain amount of time before signing. If you presented your spouse with the agreement the night before the wedding, the courts may assume that it was signed under duress or coercion.
  • Both spouses must fully disclose all assets. The agreement will only be considered valid if both parties have disclosure of their future spouse’s financial situation, including property, income and other assets. If all assets are not fully disclosed at the time of the agreement’s signing, the prenup may be considered invalid.

Courts may also deem a prenup invalid if it contains unfair provisions.

Are There Other Protections in Place?

Have you taken any other measures to protect your business, such as:

  • The preparation of a will
  • A buy/sell agreement that details what happens to company ownership if certain events occur
  • The creation of a domestic asset protection trust that transfers business shares into a trust that cannot be included in asset division during divorce

Is the Business Separate or Marital Property?

A divorce’s impact on a business largely comes down to whether the business is considered marital or separate property.

If considered separate property, the business may not be considered when dividing property. If considered marital property, the business may be considered a martial asset that will be distributed as part of the divorce.

Generally, separate property is any property that was owned prior to the marriage as well as gifts and inheritances. Marital property includes all assets and income acquired by either spouse during the marriage, including a business.

If the business was formed prior to the marriage, the value it accrued during the marriage may be considered marital property. For example, if the business was worth $100,000 at the time of marriage and worth $300,000 by the time of divorce, the $200,000 increase in value could be considered marital property subject to distribution.