You’re engaged to the partner of your dreams, the wedding date is set, and the many years’ worth of sweat and tears you’ve invested into building your business have finally begun to pay off. But in the back of your mind, the seed of a little nagging worry is beginning to germinate: What happens if, heaven forbid, the relationship later breaks down? What will happen to your business? You’re aware that under the laws of your state, without a prenup you could lose equity to your ex-spouse in the event of a divorce.
If you haven’t already, you and your partner need to talk about a prenup as soon as possible. In case you’re worried about broaching the topic gracefully, there are ways to bring up a prenup without upsetting your partner. It isn’t just lost equity that you should be concerned about if, as a small business owner, you enter into a marriage (which is itself a financial contract) without a premarital agreement. Let’s explore what the future of your business could look like in the event of a divorce if you marry without a prenup. We don’t want to scare you, but we do want you to be aware of all the possibilities so that you can make informed decisions that are good for you, your spouse, your relationship, and your business.
The Nitty-Gritty: What can happen with your business if you divorce without a prenup?
-If equity you have in a business appreciates during the course of a marriage, your spouse could be entitled to that appreciation.
-If you receive additional shares from your business after you are married, those shares/equity may be considered marital property.
-If you embark on a new business venture after getting married, shares of that business may also be deemed marital property.
-Got debt leftover from starting your business? After marriage (and in the event of a divorce), your spouse may be considered at least partially responsible for that debt.
-If a judge rules that an ex-spouse receive a portion of your business equity, they may have the right to make financial decisions for the business without consulting you. If these decisions are bad for the business it can also affect your employees, as they depend on the health of your business to provide them a sustainable income source and good working environment.
-An ex-spouse who acquires business equity also has the power to cut a bunch of staff members without warning. Yes, this does happen.
-Financial decisions made during your marriage or divorce could also put your business in an undesirable place financially. Your business’ vulnerability to your personal circumstances could also set off a chain reaction that could affect the value of your business (HG, 2022).
-If the financial circumstances of a marriage or divorce have an effect on the functioning of the business, dissatisfied customers could take their business elsewhere (HG, 2022).
-It could be necessary to sell the business to pay for a divorce settlement (HG, 2022).
What can happen to your business if you divorce WITH a prenup?
A prenup gives you power over what will happen to your business in the event of a divorce. It maps out what is yours, what is your partner’s, and what is shared. If you don’t write your own prenup, you get a default prenup in the form of whatever the laws of your state say about marital and separate property–and that might not be fair for your particular situation.
Would you consider it fair for one of you to lose a portion of your own savings to debt collectors because of the other person’s business decisions, or for one of you to receive a disproportionately large stake in what the other one built? Similarly, would it be fair for employees to suffer because of your personal problems? Mapping out what you’d like to happen in the event of a hypothetical divorce empowers you to make decisions that are fair in your specific situation, instead of defaulting to the laws of the state.
Two-time small business owner, mentor, and consultant Andy Charles took the words right out of our mouths with his appraisal of prenups for small business owners:
“Just like business partners negotiate buy-sell agreements when they form their enterprise, marrying couples would do well to create a similar arrangement in a prenup. While everyone hopes the unthinkable never happens (a breakup or divorce), setting guidelines for sharing business assets in advance will help avoid massive amounts of heartache & expense.” (Andy Charles, Personal Communication, 12 March, 2022).
As a matter of fact, many business partnerships and operating agreements specify that unmarried business partners and/or shareholders must get a prenup prior to entering into an agreement. Some attorneys even recommend that business associates require one another to sign postnups if they’re already married before going into business together (Kinder, 2020). (If you’re scratching your head right now, here’s everything you need to know about the differences between prenuptial and postnuptial agreements.)
The risks of allowing your state to mix what happens in your marriage (or divorce) and what happens with your business are not to be understated; likewise, the financial empowerment that comes with a prenup cannot be overstated. If you get a prenup and then you later divorce, what happens to your business is in your and your partner’s hands instead of in the cold, impersonal hands of the state.
Personalize your agreement
One of the best things about getting a prenup (especially if you do it through Hello Prenup) is that your agreement is personalized. Decisions about whether or not a spouse should have a stake in your business need not be black and white; you can build the agreement however you choose, giving them as much or as little equity as the two of you deem appropriate based on your specific circumstances. Here are some guiding questions you might discuss in order to arrive at an arrangement that’s good for your relationship and your business:
-Do we have any plans for my spouse to give up his or her own career to be involved in my business? If yes, aside from the income they earn from working with my company, how much (if any) and what type of equity should they be entitled to?
-If the value of my business appreciates during our marriage, should my spouse be entitled to any of that money? If so, how much?
-Do we have plans for my spouse to sacrifice his or her own career in order to raise our future children? If yes, should they be entitled to some amount of equity in my business as fair compensation for the earning and income potential they’re giving up by stepping back from their career to raise our children?
-Does my spouse have debt they are bringing into the marriage? If so, how do we want to handle this with an eye towards my business? Do I want to be responsible for some of that debt?
-Do I have debt (perhaps from starting my business)? Should my spouse also be responsible for some of that debt, particularly if they acquire equity in my business? If so, how much?
-If either of us becomes involved in a new business venture after we get married, should shares of that future business and its assets be considered separate property, or marital property?
-Should my spouse have the right, during our marriage or in the event of divorce, to make financial or business decisions for my company?
-How will we protect employees and business partners from the financial and personal fallout of a potential divorce?
Potential prenup clauses for business owners
In addition to the above considerations, there are several potential clauses one might include in a prenup which are relevant especially to small business owners:
Social Image Clause: This prevents a potential ex-spouse from airing any real or perceived dirty laundry all over Instagram or elsewhere, on or offline.
Confidentiality Clause: If you’re going to let your spouse in on secrets of your business or private information, this clause ensures that your spouse agrees to keep all of that between the two of you, no matter what happens in your relationship.
Non-Compete Clause: If your spouse is privy to confidential business information or works for your business at any point in time, a non-compete clause makes sure they won’t start their own venture and go into business in competition with you.
Separate Property: If you do indeed want your business and all income derived from it to be listed as separate rather than marital property, make sure you include a clause outlining this provision explicitly. You should have a say in what happens to your business if your life circumstances change. A prenup is one way to make sure that’s what happens; moreover, a prenup can also be the key to a peaceful divorce (although we hope it never comes to that!) And beyond your identity as a business owner, there are plenty of other reasons why you should consider a prenup. Are you ready to learn more about us or get started?
References:
Andy Charles, Personal Communication, 12 March, 2022
HG.org Legal Resources. 2022. Business Owners Who Marry and the Need for a Prenuptial Agreement. Retrieved from: https://www.hg.org/legal-articles/business-owners-who-marry-and-the-need-for-a-prenuptial-agreement-48793#:~:text=A%20prenuptial%20agreement%20is%20generally,come%20from%20the%20business%20entity.
Kinder, E. 2002. The Importance of a Prenuptial Agreement for Business Owners. Retrieved from: https://www.lawyer-monthly.com/2020/09/the-importance-of-a-prenuptial-agreement-for-business-owners/
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].
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