The process of ending a marriage is a complicated one. Things only get messier when there’s a business involved. The question then comes up: how do you protect your business from divorce?
Untangling your life from your spouse’s is delicate and complex, and splitting up shared property often becomes contentious. A business complicates things even more.
Not only do you risk losing your car or missing out on that really great couch you love so much, but your livelihood also hangs in the balance. If you have business partners, it’s not even just your source of income.
How Is a Business Treated In Divorce?
As with most facets of divorce, various factors muddy the waters and further tangle the situation. There are many elements that influence the situation and need to be accounted for.
- Does the business predate the marriage?
- Is your spouse also a business partner?
- Are other business partners involved?
With all of this in mind, here are some things to know about how to protect your business from divorce.
Your Business Is A Divisible Asset
First of all, your business is an asset. Probably one of your most valuable assets.
You dedicated every waking moment to making it a success, poured all your effort and time into it, and generally view it as a pseudo-child.
Whether it’s a construction company, small dog walking service, or multi-million-dollar software concern, the court may view it as a community property and treat it as such.
If the business predates your marriage, the court views it, at least in part, as separate property.
There are factors, however, that impact this status. If, during the marriage, you built value, especially if you invested joint funds, that changes things. Value accrued during the marriage usually counts as a shared asset.
The same goes for situations where your spouse invested money or sweat equity in the company. Mixing marital and business assets creates further complications. This makes it more difficult to draw a line between the company and the marriage.
Related Reading: How the Division of Property Works in Washington
Ways to Divide The Business in Divorce
If it comes down to it and you’re unable to protect your business in divorce, you have several ways to deal with this situation.
A few options include:
Buy-Out
The most common strategy for dividing a commercial venture between spouses is for one party to buy the other out. This works best when there’s an imbalance in interest in running the business.
Split the Business
In some situations, it’s possible to divide a company, essentially breaking it into two pieces. For example, if you and your spouse run a financial consulting service and each has a distinct set of clients, it may be possible to break apart the business in the divorce.
Business as Usual
Just because your marriage ends doesn’t mean you have to shutter your business after a divorce. Sometimes a marital relationship doesn’t last but a professional relationship endures. A rarity, and a potentially thorny situation, in some cases, divorced couples continue to successfully run a business together.
Sell the Business and Move On
If there’s no agreement to reach, the best option may be to sell it, split the proceeds, and move on.
This comes with its own set of drawbacks. How much a company sells for, if it sells at all, depends on what business you’re in, your location, demand, competition, and much more.
Only a fraction of small businesses actually sell on an open market. You may only be able to liquidate any merchandise, equipment, or corporate assets and wind up taking a substantial loss.
Related Reading: Rebuilding Finances And Protecting Your Credit Score After Divorce
Protect Your Business in Divorce
There are a variety of ways to prevent losing a business to a spouse in the case of divorce. Here are a few common strategies.
Prenuptial Agreement
If you own a business and worry about protecting what you’ve built, consider a prenuptial agreement. This contract two people enter into before marrying lays out how to divide property in the event of divorce.
It serves as a way to safeguard your assets and belongings when you marry. With such a document, it’s possible to legally ensure you maintain possession of your company.
Postnuptial Agreements
If you start a business after you’re already married, a postnuptial agreement can help protect your business from divorce.
Similar to a prenup, couples often enter into a contract specifying who retains ownership of a commercial venture when a marriage ends. This step can specifically protect what you build, even after your wedding day.
Create A Trust
One option, though a complex one, is to place your business in a trust. In this case, the company is no longer technically a marital asset because you no longer legally own it.
Once you place a business in a trust, a divorcing spouse no longer has access. There are tons of legal concerns to be aware of, but in some circumstances, this option works.
It’s usually in your best interest to hire an attorney when ending a marriage, and that goes extra when trying to protect a business from divorce.
Professionals help untangle the mess and ensure you wind up with a fair deal. You may even want to enlist a financial specialist or forensic accountant to run the numbers.
Related Reading: How Much Does Divorce Cost in Washigton State?