Is your business safe in the event of a divorce? Many entrepreneurs don’t realize that their business interests could be vulnerable without some type of marital agreement in place. A prenuptial agreement or a postnuptial agreement are both legal tools that offer a way to protect your hard work and ensure a fair outcome for both parties. If you are already married, then you cannot get a prenup—so your only option is a postnup. The main difference between these two is that a postnup is signed during the marriage. With that said, let’s dive into everything you need to know about handling your business interests in a postnup.
Why business owners should consider getting a postnup
As a business owner, you know that your business is your baby. Maybe you put all of your life savings into it or your blood, sweat, and tears, or more likely both! If that sounds like you, then protecting your business is likely one of your top priorities. Well, there’s good news. Besides just being an amazing businessman or woman who protects your business, you can also potentially get a postnup to ensure your business interests stay with you in any scenario.
Postnups can be a helpful way to ensure that you aren’t required to give up shares in your business or compensate your spouse with a portion of the value of your business with other assets. For example, in some states and in some situations, a court may “divide up” a business by valuing the business and then dividing that value 50-50. So, let’s say John’s business was valued at $500,000. John would then be required to pay his spouse $250,000 from other assets to make up for the value of the business.
Provisions to include in your postnup as a business owner
Now that you’re ready to dive into the world of postnups, what should you include? There are plenty of provisions that could potentially help you, as a business owner, protect yourself financially. Here are some provisions to consider for your postnup as a business owner:
Identification of Business Interests
First and foremost, you should identify what exactly you own in your postnuptial agreement on your financial schedule. This may include ownership shares, intellectual property, specific assets, debt, etc. This is important because postnups require financial disclosure (sharing all of your income, assets, and debts and the values of those with your spouse). If you hide or omit any of your business assets, your postnup could be thrown out.
Separate vs. Marital/Community Property
A key component of protecting a business in a postnuptial agreement is outlining whether the business is considered separate or marital/community property. If something is considered marital/community property, it is subject to division in a divorce. If something is considered separate, then it is not divisible in a divorce. Protecting your business would likely entail outlining it as separate property in your postnup.
Addressing Appreciation of Business
Another key component of protecting your business is addressing the increase in value of the business during the marriage. For example, if you started your business the week before your wedding, it’s possible that your business will grow tremendously throughout the marriage. What happens to that increase in value? Should it be separate property or marital/community property?
Management and Control
Another important provision to consider is the management and control of the business while still married. In your postnup, you can specify how the business will be managed and controlled during the marriage, including decision-making authority and responsibilities.
Valuation
You can establish a method for valuing the business in case of divorce (e.g., using a professional appraiser, a fixed formula, or a buy-sell agreement) in your postnuptial agreement. This can help avoid any disputes in the divorce over how the business is being valued.
Succession Planning
If you don’t want your spouse to inherit any business assets when you die, you might consider including a spousal elective share waiver in the postnup. This says that neither spouse can elect a portion of their deceased spouse’s estate once the other passes away. You will still want to utilize other estate planning and succession planning documents, but this can be one supplemental way to ensure your wishes are met.
Postnuptial agreements shouldn’t be one-sided
Postnups aren’t just about one person. They’re about fostering marital harmony, so both spouses should “get” something out of the marriage. In fact, some states actually require that both spouses have at least one provision in favor of them in the agreement for it to be valid. For example, let’s say Julia wants to get a postnup to protect her business. In her postnup with her spouse, Joe, they state that Julia’s business is separate property and also include that Joe’s retirement fund is separate property. This creates a balance in the agreement and helps avoid any future arguments that the agreement is one-sided and only protecting one spouse.
Potential challenges with a postnup
There are some downsides and potential considerations that come along with a postnup. Here’s what to know:
- Enforcement: Not all states enforce postnups. In a handful of states, postnups are either unenforceable or on shaky ground. Even in states that enforce postnups, some states are less likely to enforce them than others.
- Not Incident to Divorce: Postnups shouldn’t be entered into if you are contemplating divorce—you should just get a divorce settlement agreement. Postnups should be entered into when you plan to continue the marriage.
- Push Back from Your Spouse: Postnups can be a contentious topic with your partner, so it may be difficult to broach the topic with them. Or they may be totally against it altogether.
What happens to your business in a divorce without a prenup or postnup
The answer to this question will mostly depend on your state law and your unique situation, but there are some general things that typically occur when you divorce and have a business:
Categorization as separate property or marital/community property
The first step the court will take is to classify your business as either separate or joint. If it is deemed marital/community property, then it will eventually be divided according to state law. If it is deemed separate, then it will not be divided.
Valuation
Next, a court will generally have the business valuated by a professional, such as a CPA, who is trained in valuing businesses. This is typically a contentious topic because the business-owner-spouse will likely want it to be valued lower so there’s less money to split up, and the other spouse will likely want it to be valued higher so they get more.
Division
Depending on the state laws (equitable distribution or community property), the business will then be divided 50-50 or some other split. As you can imagine, “dividing” a business can get really complicated since you can’t really just split it down the middle like you might a bank account. What typically happens is that a court will take the total value and require the business owner spouse to pay their spouse a percentage of the value of the business instead of trying to divide up business assets.
The bottom line is that a postnup can help protect your business
At the end of the day, the decision to get a postnup is a highly personal decision that you need to make on your own and with your spouse. However, they can be incredible tools to ensure business owners are protected. Of course, the other spouse should also “get” something out of the business, so it is considered a fair and balanced agreement. There are tons of ways to incorporate provisions into your postnup that protect your business—from marking the business as separate property to including a valuation method clause and much more!
Ultimately, a well-drafted postnuptial agreement can provide invaluable peace of mind and security for business owners, allowing them to focus on growing their business and nurturing their marriage
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: Nicole@Helloprenup.com
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