With 1 in 2 marriages these days ending in divorce, the distribution of assets becomes a stressful and challenging ordeal. Things get even more complicated if a business is involved.
Whether you're a majority shareholder, a member of a board or a CEO, there are things you can do in advance to ensure the dissolution of your marriage doesn't disrupt your earnings or your organization.
What are the impacts?
Divorces are messy. Aside from the custody of children, the financial implications are the most daunting. Even if the dissolution of the marriage is uncontested, there may still be a claim on everything in your name.
There's one massive reason for this: marital property. Defined as "all income and assets acquired by either spouse during the marriage," it includes money in a savings account, stocks and bonds, and other assets.
Community property or equitable distribution
How much is actually at stake with your business? Currently, nine U.S. states are community property ones: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If you reside in one of these, it's an even 50/50 split.
The other 41 states are considered equitable distribution areas. In these places, the final determination regarding marital property is determined by a court. Decisions like this could become a lengthy process, mostly if neither party agrees on what is a fair division.
Divorces are a drain on the emotions of everyone involved. If you're operating a business, your focus could shift during this time, putting your company in jeopardy. You may be distracted by discussions with lawyers, collecting and providing documentation, or the toll that the situation has placed on you.
A considerable challenge arises if you're a significant stakeholder. If your ex receives a substantial portion of your stock during the settlement, they could become an uninvited partner, throwing the business into chaos. Further to this, your interest has been diluted, possibly causing your status to change.
Suppose your spouse is currently or was ever involved in the business, especially in a senior capacity. In that case, the situation gets even more complicated, as they still have a say on the day-to-day operations. They may have received a portion of your stock, as well, increasing their position.
There are two scenarios here. First, they leave the business, selling their stake, which immediately removes the tension and may affect the stock price. Second, they remain, which could cause office tensions that may never dissipate.
What can you do?
What's the best way to avoid this becoming a reality? Protect your business in advance, before you get married, and make savvy decisions along the way. In addition, other steps you can take include the following:
Draw up a prenup or postnup agreement.
Before the wedding, no partner wants to admit that the marriage could fail. However, if there are considerable assets involved, including an existing business, facing facts is vital.
Entering into a prenuptial before or a postnuptial shortly after the wedding will clearly define what happens to the business should things turn sour. The first issue to consider is whether the existing company should be considered as part of the joint marital property, even if one partner was actively involved in running the business during the marriage.
Other things to be included are the company's agreed value at the time of the divorce and whether any appreciation of assets gets passed on.
Separate your finances.
Don't use collateral in your home to invest in your business. By keeping these assets separate, there will be less confusion later as to what belongs to whom.
Pay yourself a decent salary.
Many business owners pay themselves a reduced salary to ensure that they remain in a liquid state. The disadvantage here, though, is that there's more leftover to distribute in the event of a divorce. Paying yourself a higher salary leaves less available if it turns out you need to pay considerable settlement later.
Put the business into a trust.
When the business is put into a trust, you don't own the business. That way, there’s nothing in your name that gets included in the settlement. However, there are laws about the fraudulent transfer of assets. If you know that you and your spouse are likely going to divorce and you move the business into a trust, your state may consider that transfer null and void.
Take out an insurance policy.
If the divorce settlement costs more money that what you have available, you don't want to be in a position where you must sell all or part of your business to cover it. Having a whole-life insurance policy you can liquidate might prevent this situation from occurring.
What if it's too late?
If you believed things would last forever and didn't take steps to protect yourself when you were married, it’s not too late. There are things you can do.
Sell the business.
As drastic as it sounds, this may be the ultimate solution. If due to stock distribution, your former spouse is now involved in the business, and this working relationship is untenable, the only option is to bail out. Bear in mind that monies from the sale of your company will also be divided up according to the court decision.
Sacrifice other assets.
You may be able to hold onto 100% of your business if you give your ex-spouse a higher, or the entire portion of, one or more of your other assets. Perhaps the family home is more important to them than it is to you and could be used as a settlement tool to secure your ownership of your company.
Sell a stake in the business.
To finalize the divorce settlement, you may need to get your hands on some instant cash. Rather than selling the whole business, consider offering a portion of your stock to existing partners or employees. You could even negotiate a buy-back agreement for a later date.
Make payments over time.
You and your ex may come to some agreement, where the settlement gets paid out over some time, perhaps as a garnishee of wages. Making this arrangement meets your commitments, and your business interest is protected at the same time.
Divorce is real.
Unfortunately, not everybody gets the fairytale ending. When a divorce happens, entities like businesses get dragged into the settlement agreement.
To protect yourself, and your company, from being a victim of your marriage's dissolution, you must prepare in advance. Arrange a pre or postnup. Separate your personal and business finances, and pay yourself a decent salary. Consider putting the company into a trust and taking out a whole life insurance policy.
However, if it's too late and you didn't take precautions, there are things you can do. You could sell part or all of the business, make a binding agreement to offer other assets in place of the company or make settlement payments over time.