Divorce is no easy matter for most people, but when one of the spouses runs a small business, their entire living can be put in jeopardy by a divorce. In the latest episode of Ask Lloyd, this topic was discussed in detail with business and real estate attorney Jamie Hamelburg. Together they reviewed some important considerations and made some strategic suggestions for small business owners considering a divorce.
Thinking Way Ahead
For small business owners who are contemplating marriage, there are a few different ways that they can plan to keep their business safe in the event that the relationship turns sour. Each of these steps needs to be taken before marriage.
- Review and revise organizational documents. Regardless of the form of entity (e.g., corporation or LLC), it is possible to anticipate divorce in the organizational documents. This is a particularly good option if a couple is in business together.
- Get a prenuptial agreement. A prenuptial agreement between the couple planning to get married spells out the ownership and rights to a small business, sets the record straight, and protects the parties in the event of a divorce.
- Place the business in a trust. If a business is family-owned, it may make sense to transfer the business into a trust so that there is no question that marriage does not give the new spouse an ownership interest in the business.
Each of these options is a good idea if the business owner wants to make sure that they have total control over the outcome in the event of a divorce. The prenuptial leaves some room to negotiate as well. None of these options should be done without conferring with the appropriate attorney to make sure that the documents have the intended effect.
When Divorce is Looming
For the small business owner thinking about divorcing their spouse, it can be terrifying to think that their business is at risk for the sake of personal happiness. Jamie strongly recommends taking a close look at the business organizational documents to see if there is some guidance about what will happen in the event of a divorce. She also notes that there are some strategic steps to be taken to impact the valuation of the business in case an owner wants to buy their spouse out. In particular, Jamie recommends that an owner not short-change themselves when it comes to paying salaries. While this will reduce the liquidity in the business (i.e., the cash on hand to run the business), it can also reduce the overall value, which could make a buy-out less expensive. Lloyd cautions against trying to move assets out of the business right before filing for divorce since the other spouse may be able to claw the assets back.
The Divorce Itself
Even if some advance preparation has occurred to protect a business, there is always room for negotiation in a divorce. During the process, lawyers will assess the ownership rights of each spouse and often hire a valuation expert (usually a CPA) to determine what all the assets (marital and non-marital) are worth. With allocations and valuations in place, the parties can move the pieces around to accomplish their respective goals. Both Jamie and Lloyd agreed that it is important for each party to be clear on their priorities and negotiate on that basis. They also caution that failure to come to a private compromise can lead to an expensive trial, in which there is a risk that the outcome hurts everyone.
Wherever you are in your relationship, if you are a small business owner, you should be aware that marriage can give your spouse an interest in your business that they take with them in the divorce. To prevent this from causing irreparable harm to your business and your finances, you should work with expert counsel to make sure that you are protected.