06 May You Don’t Have to be Married to Divorce-Proof Your Small Business
By Tonya Graser Smith
It’s National Small Business Week, and here’s something many entrepreneurs need to do: divorce-proof their enterprises.
Imagine, your spouse or that of one of your business partners files for divorce and stakes a claim on the company, which could be considered marital property. You could lose all or part of your business.
That’s just one of the worst-case scenarios.
Suppose the divorce-seeking spouse subpoenas partners, employees or company records, including financial statements and client files. Anything and everything about your company could become public record for competitors to leverage. Your business’ reputation and proprietary information are up for grabs. Your ability to run your company and turn a profit are in jeopardy.
Here are the steps to take to keep your business from being dragged into divorce court and potentially split into pieces.
- Insist on prenuptial or post-nuptial agreements.
If you’re getting married or already are married, you need to get a prenuptial or post-nuptial agreement in place that will keep your business from becoming an asset that’s damaged or diminished in the event of divorce. Seek the help of family law attorneys. In the case of a prenup, you and your betrothed are best protected by reviewing the agreement with separate attorneys.
Likewise, you must require prenups and post-nups from those who have a business interest in your company. Before a new managing partner or member joins your business, require that they produce a signed prenup or post-nup that protects the business if they later go through divorce. If your business partner is single and not engaged to be married, make sure your business or operating agreement stipulates that your continued partnership is contingent upon a prenup if they get married later.
- Be transparent about the valuation of the business.
In your business operating agreement, spell out the value of your business. You want to be clear about its value – and how and how often that valuation is determined. Your aim is to mitigate the need for your company’s financial records to turn up in divorce court.
- Keep your personal finances and business finances separate.
This one is fairly obvious but is worth repeating. If you entangle personal and business finances, you are asking for trouble if you or your business partner divorces. It will be harder for you to keep your business undivided.
- Pay market wages.
Pay yourself, your business partners and any working spouses market wages for respective work done for the company. If you don’t pay market wages be transparent about when you will pay market wages – say because you are reinvesting profits to grow the business. If you don’t, a spouse going to divorce court could try to stake a claim on some of the company’s future earnings and make a mess of your business’s ability to recoup those future earnings.
- Have a buy-sell agreement.
You want to have a buy-sell agreement, also known as a business will, in place. A buy-sell agreement could prevent your spouse or that of a business partner from acquiring ownership of the company.
- Hire a team of professionals.
You need a team of experts to ensure your company remains divorce proof.
Hire family law attorneys for the prenuptial and post-nuptial agreements. A business or employment lawyer can help you get your operating and buy-sell agreements in place. A financial planner might also be necessary for the financial aspects of the buy-sell agreement. A certified public accountant can help ensure your personal and business finances are kept separate and also advise you on the appropriate market wages to pay yourself and others.
Bottom line: Whether married or single, you need to divorce-proof your business. You could get it done well ahead of the next National Small Business Week, too.