Protecting Your Business During a Divorce
California is in the small minority of states that have community property
. That generally means that each spouse owns half of the property accumulated during the marriage, regardless of how it’s titled. It also means that each spouse is responsible for half of the debt incurred during the marriage.
If you’re going through a divorce, one of the last things you want is for your former spouse to be your business partner. The only thing that might be worse is being required to sell the business in order to pay off the debt that your spouse accumulated during the marriage.
A spouse who was a ghost employee of a business or who helped in the operation might claim a significant portion of that business. The fundamental equation is simple. The more involved a spouse is a business, the larger share of the business he or she can claim. If your business is a partnership, then your spouse could take a percentage of your partnership share.
Another method of protecting your business from your spouse is a prenuptial agreement. Many self-employed individuals overlook prenups and marry without one. If that’s the case, you might want to look at a postnuptial agreement. It’s the same thing as a prenuptial agreement, but it’s entered into after the parties have been married.
There are questions as to whether the postnup is as enforceable as the prenup, but notwithstanding those issues, it’s still the best alternative to a prenup. They’re harder to enforce than a prenup, because from a court’s perspective, spouses have a fiduciary responsibility to each other in that each party must act in the best interest of the other party. If properly drafted, with the parties living up to the agreement, courts will recognize and enforce the postnuptial agreement.
Once you enter into a prenup and get married, you’re tied to that agreement unless a court voids it. Postnups, like wills, can be updated. Should one spouse suddenly receive a bonanza, either from inheritance or otherwise, they might want to revisit the terms of the postnup.
Pay Yourself a Salary
Paying yourself a competitive salary can also protect your business. If you reinvest your earnings back into the business, your spouse might claim that they’re entitled to more community money or a larger share of the business since they got less than they deserved from your money that went back into the business.
The actual business agreements between partners or shareholders should also protect their business interests from your divorce. One way might be a first right of refusal of other partners or shareholders to purchase the shares or interest of the party getting divorced. By virtue of such a provision, they maintain control of the business.
Contact us at Sarieh Law if we can help you make the right choices during your divorce. We specialize in family law and we will stand with you through these difficult times. Call today or fill out our online contact form and we will get in touch with you.