When all is good and sweet, it’s not usual for a couple to talk about serious matters like finances or prenups. But when the marriage unravels and one realizes the impact of divorce in their business and properties, that’s when the “what ifs” and “only ifs” begin. When you worked so hard to grow your business, your world could crush upon knowing that you could lose it to your ex. Making a prenuptial agreement is certainly the best way to protect your assets from the consequences of divorce. But what if you failed to do it? Don’t worry. There’s still hope. Check out these tips to protect your business while your divorce is taking place.
Know Your State Laws
If you are getting a divorce in Rhode Island, there are some basic laws concerning property division that you should know. One is about equitable division. It is usually worth the effort to work with your spouse and create a marital settlement agreement (MSA). It’s a written document that tells the court you have agreed to divide your property. Otherwise, the court will split your properties based on a system called “equitable division”. What is fair or equitable is something the court will have to decide based on certain factors, including how much each of you contributed to the marriage.
Again, letting the court decide on your property division is not a good idea, especially if you have a business that is currently considered a marital asset. So as much as possible, you want to keep your relationship with your spouse civil and amicable. This is the easiest, quickest and least expensive approach to protecting your properties and assets. However, if it’s no longer possible to make a peaceful arrangement with your spouse or there are certain assets that are in dispute, you will have to fight for your business ownership the hard way. It’s important to get a good lawyer who will walk you through the process.
Assess your Spouse’s Involvement in the Business
Start by determining your spouse’s contribution to your business. It’s better if he or she is not an employee because lack of involvement would weaken your spouse’s claim over the business value. Take note, however, that involvement is not only limited to employment. It could also be in the form of providing business innovation idea or advice. Your spouse’ role as a homemaker such as staying home to care for your children allowing you to build your business could play a major role in determining the share of the company the Court will award your spouse. Your spouse supporting you while you earned your professional degrees or education could also play a role. Cheating and fault issue could also factor into the equitable division in some states.
Buy His or Her Share
You have several options to ensure that your business remains under your ownership after a divorce. One is establishing a buy-and-sell agreement. Yes, it’s going to be costly but it’s an easy way to fully acquire the business. If you have other business partners, you can give everyone the right to buy out the interests of the divorcing partner and their spouse. In this case, you still have to compensate your spouse for his or her share in the company but you can prevent him from remaining a co-owner.
Before this could happen, you first want to determine the market value of your business. The best way to do this is to agree on a value that both of you can live with. Otherwise, seek a neutral, court-appointed valuation or a private joint appraisal professional to establish your business’ value. Once this has been settled, the next step is to figure out how you will buy your spouse’s share. Would it in cash? By offsetting it against your other assets, or through installment payments. Speaking of compensating your spouse, you might consider sacrificing your other assets in exchange of full ownership of your business especially if you don’t have enough money to buy out his or her share. During the divorce settlement, you may offer to give up your share in the family home, properties, vehicles, retirement accounts, and other collectibles in exchange for 100% ownership of your business. Alternately, you can raise funds to acquire your business. Consider a small business financing or borrow money from your friends or relatives.
Keep your Business Expenses Separate
It is important to stay organized and keep your business expenses separate from your household expenses. Pay yourself a market-rate salary. If the court finds out that you’re using your family’s cash flow to keep the business running, your spouse’s attorney might later make the case that your spouse is entitled to more of your company assets.
Keep a Record of Everything
To establish that you are the rightful owner of the business, you need proof. So make sure to keep track of everything, from gas receipts to equipment purchases, investments, contracts, etc. Don’t borrow from your household budget to fund a new machine or pay your employees.
Consult an Attorney
Your attorney will be your best friend during the whole process. Hire an experienced lawyer who specializes in divorce. Be honest with him or her and keep an open communication. Your attorney should know everything – even the smallest detail about your situation and what you want to achieve after divorce. You may have a lot of questions. Sure, you can DIY your divorce but it’s not the safest path to take, especially if you are after protecting your business.
Hope for the Best, Expect the Worst
Divorce is a painful and stressful process. No couple gets married thinking that they will end up in divorce. If both you and your spouse operated the business during the marriage, it’s going to be an issue during the divorce. Take note that the business you started before the marriage is considered an “individual property”, not a “shared property”. The best way to protect your business from divorce is by establishing a prenuptial agreement. Nonetheless, if you’re married and divorce is underway, it’s time to take immediate action to protect your business. By following the tips and suggestions listed above, you’ll have a good chance of obtaining full ownership of your business.