The decision to launch and run one’s own business can be a rewarding yet challenging undertaking. In the midst of a divorce, business ownership often becomes a point of contention and can be a tricky factor to navigate. Business, particularly small businesses, are valuable assets that often require owners to risk much of their life’s savings. While such dedication is admirable, in the face of divorce it can pose an imminent threat for one’s financial future. There are, however, helpful precautions one can take to protect his or her assets in a divorce settlement.
Probably the most direct way to safeguard against a business being overtaken by an ex-spouse is through preemptive measures like a prenuptial agreement. A prenuptial agreement is a binding contract signed by each partner prior to a legal marriage that outlines how all assets, property, and income will be distributed in the event of a separation, divorce, or death. A prenup is likely one of the fastest, easiest, and least expensive ways to protect a business from an ex-spouse during a divorce.
If couples do not sign a prenup, another option is a postnuptial agreement. Signed after a legal marriage has been executed, this document is often used as an update for existing prenups. Postnuptial agreements can also outline that if there is a divorce, a spouse gets a set amount or portion of assets before a certain date. Such agreements can protect a business if the spouse who owns the business acquires assets through it. Still, it is important to note that these agreements tend to be regarded by judges with some skepticism, and should not be the first resort in divorce proceedings that involve business ownership.
As previously mentioned, entrepreneurs and business owners are advised to protect themselves well before marriage or divorce is even in question. An initial way to do this is to assess the legitimate and documentable level of involvement a spouse has in the business. Documenting a spouse’s contributions (or lack thereof) to the business in question will strengthen the case for why one party should retain all or the majority of the business’ assets. Detailed documentation is always a good idea when running a business of any kind, but it can be especially beneficial when arguing a case of ownership.
Another potential way to safeguard one’s small business earnings during a divorce is to pay yourself a salary. While it may seem like the best thing to do is to invest all of your earnings back into the business, paying yourself a competitive salary that allows for personal support establishes financial stability separate from the business entity. It will be harder for an ex-spouse to make the case that you did not financially contribute to the family if you have proof of a stable income.
While all of these are viable options, determine the right one is where you’ll need the expertise of a family law attorney. For more information on navigating business ownership in a divorce or to partner with business owner lawyers, contact the Romanowski Law Offices or call us directly at (732) 603-8585.