Divorce And Family Business

Divorce and Family Business

DIVORCE AND THE FAMILY BUSINESS

It can happen to the best of entrepreneurs. While a new business owner is putting in long hours to build a business, a marriage can fray. The next thing the owner knows, his or her spouse may be filing for divorce. If you're not careful in a divorce, you could find your ex is your business partner -- or you could be fighting to keep your enterprise from being sold to raise cash. Or you might lose the business to your ex. 

In California, (as well as Texas, Arizona, Idaho, Louisiana, New Mexico, Nevada, Wisconsin and Washington), the standard is community property. Therefore in California, there is an assumption that there will be an even split of all property owned or held in the name of both spouses. The court will still look at fundamental fairness, but the presumption is that there will be a 50/50 split of the assets.

For the entrepreneur of a small company, however–without an enforceable pre/postnuptial agreement eliminating the entity from contention–the family business is viewed as another asset in the marital estate that is subject to distribution upon divorce. 

Regardless of whether it is an S corporation, a limited liability corporation, limited partnership or even a sole proprietorship, you have the right to have this entity valued and fairly distributed–typically in the form of a lump sum payout to the uninvolved spouse–when you and your partner part.

WHAT ARE THE OPTIONS AND CONSIDERATIONS IN A JOINTLY-RUN BUSINESS

The small business or professional practice is one of the trickiest assets to value in a divorce case.

 

Each business is complex, consisting not only of tangible assets like buildings, bank accounts, inventory, tools, fixtures, furniture and machinery; but also, intangible assets such as mortgages, leases, patents, trademarks, unlisted stock, skilled labor, accounts receivable and most notably, goodwill.

No one wants to think about getting a divorce, especially when you work with your spouse. 

Divorce Family Busines Options

Some split up the business and some continue to work together—there’s no right answer, there’s no one solution. Immediately after initiating a divorce, no matter how amicable, there is going to be a transition period. Take time apart in all areas to better understand what you want instead of rushing to break up the business or stubbornly attempting to stay together. 

Most business people understand the importance of putting all business transactions in writing. Yet, married business owners seldom create a plan that addresses divorce or separation, leaving them unprepared for the substantial harm that divorce can have on a business. 

There are different ways to create the necessary plan, including a prenuptial agreement, a shareholder agreement or a buy-sell agreement. Either way, you need a written agreement that provides instructions on how the business interests of the co-owners can be bought or sold.  

Further, even if you decide to work together once divorced, you need to be careful to give yourself an out if your business relationship begins to deteriorate. Make sure all company bylaws have an exit clause you both agree on, in case at some point one of you wants out of the business. 

Just as you should put an exit clause in your bylaws, accept that months, or even years, down the road, your positions in the company may shift. By taking the pressure off making all your decisions at once, you can give yourself time to adjust to your new post-divorce relationship. 

DETAIL SPECIFICS OF YOUR BUSINESS PARTNERSHIP

An article in the April 2014 issue of Entrepreneur gives the following advice: Sit down with an attorney now and spell out the following specifics of your business partnership:

  • Signature authority. This grants the power to sign checks and enter into leases, contracts and financing arrangements without your spouse's signature. This protects one spouse from being held hostage by the other's leverage.

  • Personal guarantee. If one spouse is a minority stakeholder, he or she shouldn't be liable for company debts (especially if the other one is the one with signature authority). This prevents one spouse from saddling the company with debt out of spite and making the other spouse responsible for a share of it.

  • Separation trigger point. Spell out the exact terms that will define a separation in your marriage. (I know, it's not an easy conversation to have.) This will give you a clear date upon which the value of your company will be based. This prevents either party from dragging out the separation while slowly devaluing or destroying the company in anticipation of a divorce.

  • Buy/sell Agreement. Protect your business with insurance and / or an account that will cover the cost of buying out your spouse's share without requiring you to liquidate the business.

  • Operating Agreement. Not legally required, but a well-drafted agreement will stipulate what is expected of each owner; how profits and losses are assigned; procedures for transferring, buying and/or selling ownership interests; and just about anything else you want it to say, including restrictions on the ability of ex-spouses of owners to have any ownership interests whatsoever in the business.​

One bright spot for entrepreneurs: It's rare that a business ends up being sold off to satisfy a divorce settlement. That's because it would deprive the business owner of the future income needed to pay any support payments.

A jointly-owned business is obviously a difficult situation during divorce. Take the final decision-making in regards to the business slowly, and discuss alternatives with your attorney as well as a divorce financial planner to ensure you are considering all viable options.

Please don’t hesitate to call or email me if I can help you find clarity with your business asset, and what you need to consider in the divorce process.

Tags: divorce considerations, jointly-owned business, family business, entrepreneurs, corporations, asset division, community property

This information is not intended to be a substitute for seeking legal advice from an attorney. For legal or tax advice please seek the services of a qualified attorney and/or qualified tax professional.

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