You’re a small business owner. You’ve poured your heart and soul into building your company, putting in long hours, nights, and weekends, sacrificing time with family and friends. Your company is now up and running and you’re turning a profit. Great, right?
Well, if the long hours that you’ve worked to build your company have taken a toll on your marriage, your hard work could turn into big profit … for your former spouse.
Just like a salary or stock options or retirement accounts, a business is an asset subject to California’s community property rules. In general, community property dictates that everything earned during marriage, as well as everything earned from assets invested during the marriage, is subject to 50-50 division between the parties in a dissolution proceeding. So, even if you were the one putting in 75 hours a week to grow your business, your ex-spouse may be entitled to a 50% share.
Additionally, due to certain restraints placed on property during the dissolution process, your divorce may interfere with the running of your business, especially if you are trying to expand, invest more capital or otherwise make a big change to your company during the process. In some cases, your ex-spouse may be able to effectively veto certain changes to the structure of your company.
So, how can you protect this major investment of time and money?
One very good solution, if you are not currently married but are planning to be, is to have a pre-nuptial agreement put in place. Some people think that these are only for the very wealthy but many ordinary Californians have these in place to protect their businesses and reduce potential conflicts. If you own a small business and are thinking of getting married, you should look into a pre-nup as an essential element of the wedding planning process. The pre-nup can be used to make an explicit agreement that an existing business will be considered separate property, limit your former spouse’s share of business revenue or dividends in the event of a divorce, and most importantly, prevent a former spouse from claiming an ownership interest in your business.
If you are already married, there is still a solution for you. A post-nuptial agreement operates, in principle, very much like a pre-nuptial agreement. It can be used to protect your business just like a pre-nup. Although further disclosures may be required, due to the unique relationship of trust between married couples, post-nups are frequently used by small business owners, especially when entering into partnerships or incorporating. In fact, partnership or operating agreements sometimes contain clauses requiring that any married owners enter into post-nups with their spouses, in order to protect the business itself.
A caveat: as with any agreement used in a dissolution proceeding, the court has a right to review the agreement for fundamental fairness and may, if necessary, alter or strike terms from such agreements when creating a Judgment of Dissolution. However, as long as certain formalities are observed in the drafting, review and signing of a pre or post-nup, the agreement is generally enforceable in a subsequent dissolution proceeding.
One final way to give some protection for your business in the event of a divorce is to build protection into the operating agreement itself. Many agreements include buy-back provisions, designed to regulate the process by which a shareholder or partner’s share may be bought back by the other owners/partner or the business itself in the event of death. These provisions can be easily extended in the agreement to cover shares that may be awarded to a spouse during a divorce.
It’s an awkward discussion to have with your partner, but putting a pre or post-nup in place can save both of you time, money, and stress if you get divorced. And, it gives you the confidence to continue to put your all into building your business, knowing that you will receive the rewards for all your efforts.
Jennifer E. S. Martin is a family law and estate planning attorney practicing in the San Francisco East Bay Area. The Law Office of Jennifer E. S. Martin, located in Pleasanton, helps clients navigate the difficult dissolution process and helps families put together personalized estate plans to protect their future. www.eastbayfamilylaw.com
Nothing in this blog is intended to constitute legal advice. Accessing this blog does not establish an attorney-client relationship between you and The Law Office of Jennifer E. S. Martin.