So, you decided to strike out on your own and start a business. That is huge! And after all the blood, sweat, and tears that went into building your own company, it’s only natural to want to protect it. How can you do that? Well, if you’re a business owner on the road to marriage, consider a prenup!
While most people know that prenups can protect your personal assets, they can also protect your business interests as well. Should you divorce, a business may be considered an asset that is subject to division and distribution. Many factors including your spouse’s involvement could result in the business being designated as marital property. Depending on what state you live in, that could mean that your spouse is entitled to as much as half of your business. Knowing what’s at risk and planning ahead is crucial in order to protect your hard-earned business.
How Prenups Work
A quick primer on prenups: prenups are legal contracts entered into by couples planning to marry. These agreements allow couples to decide how they would like their property and assets treated during marriage and how they will be divided upon divorce. This allows couples to get on the same page about their finances, and while no engaged couple likes thinking about divorce, your prenup can also preemptively streamline and destress the process. Allowing cooler heads to prevail and ultimately results in more amicable splits. Your prenup can cover a wide range of issues including alimony, income, retirement accounts, inheritance, and… your business!
How Divorce Can Affect Your Business
Divorce can put more than just your personal assets at risk. If your business is designated as a “marital asset”, it will be subject to division between you and your spouse. Many factors, including what state you live in, determine what property is marital property. In general, marital property is property acquired during the marriage. However, it becomes much more complicated than that, especially when a business is involved. Even assets owned prior to marriage can be considered marital property depending on several factors. For example, perhaps you started a business before marriage. After marriage, your spouse helped out with the business, and you invested marital funds into the company. In that scenario, it is likely that a court will determine that at least a portion of the business is considered “marital” and subject to division upon divorce.
If you start a business after you get married, regardless of the involvement of your spouse, the business will likely be considered a marital asset. However, there are exceptions. For example, if you inherit the business, it will likely be considered a separate asset.
So, if the court does determine that part or all of your business is marital property, what happens then? Well, your spouse will likely be entitled to a portion of the business. The division of assets depends on numerous factors, including the state you live in. If you live in a community property state, your spouse may be entitled to half of the business. In equitable distribution states, the court will likely try to divide the property “fairly”. The determination of what is “fair” can vary widely.
At the end of the day, the court may determine that your spouse is entitled to a portion of your business, even if that spouse had little to no involvement. This can have a huge impact in the operation of the business, especially if you and your now ex-spouse are not on good terms.
How a Prenup Can Protect Your Business
If your business is your baby, or you just want ownership decisions to be made by you and your spouse – and not the state – having a prenup can provide much-needed peace of mind. In addition to wholly declaring that the business is separate property, there are several other ways that your prenup can deal with your business.
For starters, your prenup can document the value of the business at the time of the marriage. This may be important if a portion of the company is later determined to be marital. In that case, the “marital” portion/value of the company could be clearly differentiated from the non-marital portion/value. Maybe your company grew substantially after getting married, or maybe the bulk of the value was realized prior to marriage. Either way, determining the value of the company at the time of signing the prenup can help clear things up and protect its premarital value.
Prenups can also determine a fair division of the business if that is what you and your spouse desire. This can be common when a spouse helps out with the business, and even when they don’t. Oftentimes, spouses contribute labor in the form of caring for the couple’s children which allows the business owner to invest the necessary time needed to grow the business. Couples can use their prenup to protect and provide for spouses in this scenario.
However, perhaps you want to recognize the unpaid labor of your spouse without ceding any of your business interest. If that is the case, you and your spouse can come to an agreement in which your spouse receives certain property and assets instead of an interest in the business. For example, maybe the prenup states that the non-business owning spouse gets the marital home, half of the business-owning spouse’s retirement account, and specified bank accounts. This allows both spouses to be provided for while also protecting the business.
One last note: don’t forget about debt. If you get married in the beginning phases of your business, or if your business turned out to be unprofitable, your spouse could be on the hook with you for any debt accrued in forming the business. Debt is also included in marital/community property. Make sure you address debt in your prenup – personal and business. If you want to keep the debt separate – you and your spouse should specify that any business-related debt is considered the property/responsibility of the business owner.
How HelloPrenup Can Help!
HelloPrenup is specifically designed to give you peace of mind when you need it most and protect yourself in every way possible, including your business. Our platform allows you to easily negotiate directly with your fiancé and focus on what’s important to you both. You can add provisions to ensure that your business is protected in the event of divorce. Think of this as setting up a business plan for your life. Check out how it works and FAQs for more answered questions!
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here Questions? Reach out to Julia directly at [email protected].