Protecting Your Family Business From Divorce
If you have a family business, chances are it is not only a source of income, but of pride. Whether it was handed down from your parents or grandparents, or you built it from the ground up, it is likely that you have a deep personal (not to mention financial) investment in the business. You probably do everything possible to safeguard your business from threats from competitors or downturns in the economy. But you may not have thought about protecting your family business from divorce.
You may not intend to divorce; most people don’t. But the reality is that nearly half of all marriages do end in divorce. If yours is one of them, and your family business is the principal asset, trying to divide it upon divorce could result in its failure. Here are some considerations for owners or part-owners of family businesses.
Prenuptial Agreements: Hope for the Best, Prepare for the Worst
If you are reading this as someone who owns a business and is preparing to marry, that is good news. The best time to protect a business from divorce is before the marriage even happens. A prenuptial agreement can allow you and your future spouse to agree that the business will be considered non-marital (separate) property and remain in your hands in the event of divorce. You could also agree that value added to the business after the date of your marriage will be considered marital property. In that case, you would also want to agree on the value of the business as of the marriage date.
You should consider a prenuptial agreement even if, at the time of your marriage, your business is a side hustle or not a major source of income. Things change over the course of years and decades, and, just as your marriage could take a turn for the worse, your business could grow beyond your wildest expectations. A properly-drafted prenup will protect you if you need it. Already married? You can still accomplish most of the same goals with a postnuptial agreement.
If the idea of a prenup or postnup makes you uneasy, consider a buyout agreement, often called a buy-sell agreement. This is a contract between co-owners of a business designed to protect the business (and remaining co-owners) in the event one co-owner dies or leaves the business. A buyout agreement is a good idea any time two or more people go into business together.
In the case of a divorce, the buyout agreement could require an ex-spouse who received an interest in the business as part of the divorce settlement to sell that interest back to the other spouse at a pre-set price, or a price set by a predetermined valuation method.
Keeping Good Records
If you choose not to execute a prenup or a contract with your spouse, protecting your family business from a divorce (to the extent possible) will depend on avoiding commingling business assets and your marital assets. Clearly document the source of your business’s capital, especially if the business was funded with separate, non-marital assets.
If the business is established before your marriage, establish yourself as the sole owner. Make sure that the documents establishing the business entity specify that no interest in the business may be transferred in a divorce. That doesn’t mean that your spouse won’t be entitled to some of the value of a business that is considered a marital asset, but the business itself will remain in your hands.
If your spouse works for the business, pay them market rates for their work. If they are paid less than market rates, they may argue in a divorce that their under-payment helped contribute to the business’s value, and that they are entitled to part of the business in divorce. By the same token, if you’re under-paying yourself by comparison to market rates, your spouse could ask the court to impute a higher income to your for the purposes of calculating alimony. In a nutshell: pay yourself and your spouse what you’d be paid in similar positions in a non-family business.
Protecting the Family Business From Your Child’s Divorce
Of course, it might not be your divorce that you’re worried about. What if you’ve spent decades building up a family business to leave to your child or children? What will happen to it in the event your child’s marriage breaks up? You probably don’t want your child’s ex to have an interest, or decision-making power, in the family business.
A trust may be the answer to your concerns. You could create a trust for each of your children, funding it with stock in the family business. The trust can be set up to benefit only your child, not their spouse. So long as the stock, or any proceeds from the sale of stock, remain in the trust, it should remain safe from a future spouse in the event of divorce.
Unfortunately, this type of setup cannot be used to protect your family business from your own divorce, but it is common to protect assets for one’s children in this way in high-net-worth cases.
If you own a family business and are facing divorce without having taken any of the measures listed above, the best way to protect your business is to get the help of a Utah family law attorney with experience in the division of complex assets, such as family businesses. We invite you to contact Barton Wood to schedule a consultation to learn more about protecting your family business from a divorce.