Discussing whether your business should be separate or marital property with your partner may not be romantic, but is absolutely necessary.
When starting a business, young entrepreneurs rarely think about marriage, much less prenuptial agreements.
Instead they are focused on finding startup capital, hammering out their margins, or improving the product.
While these responsibilities certainly take precedence, overlooking a prenup before you get married can be catastrophic to your business if your marriage goes south.
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How a Divorce Can Put Your Business at Risk
A divorce can severely cripple your business.
All the time and money you invested in building your company from the ground up can be nullified the instant you and your partner decide that your marriage is no longer sustainable.
Even if you were to start your business before you were married, your spouse is entitled to half or more of any appreciation in value that your company experiences during your marriage.
So if your company was worth $1 million before you got married and $2 million at the time of your divorce, your spouse is entitled to 50 percent of that $1 million increase in value.
Debt can also become an issue during a divorce. Remember that after getting married, you and your spouse share each other’s debts.
So assuming your spouse has debts, their creditors can still potentially come after your business assets after the divorce.
Finally, it’s important to remember that as a business owner without a prenup, it’s not just you who will be devastated by a divorce; your employees will also be negatively affected.
If your ex-spouse is awarded half of the value your company accrued during the marriage, you will almost certainly have to cut a portion of your staff and sever business relationships.
Is it fair that hardworking, dedicated workers are let go because the owner took an unnecessary risk?
How to Structure a Prenup to Protect Your Business
Discussing whether your assets should be separate or marital property with your significant other may not be romantic, but is absolutely necessary if you want your business to survive the divorce.
1. Treat any Appreciation of the Business as Separate Pre-Marital Property
Prenuptial agreements are contracts between couples that classify premarital assets as either separate or marital.
An enforceable prenup allows you and your spouse to agree which of your assets will maintain their pre-marital character, thus exempting these assets from splitting any increase in value.
Characterizing your business as a separate property helps prevent your spouse from taking 50 percent of your businesses appreciated value.
So when discussing your prenup, make sure to include a provision that addresses the appreciation of not only your business, but all your pre-marital assets.
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2. Limit Your Debt Liability
As mentioned earlier, debt can be a complicated aspect of divorces. Depending on the state you live in you may even be on the hook for debt that your spouse incurred alone.
For instance if the debt was used to acquire something that could be considered beneficial to the marriage, then it will be seen as shared debt between you and your spouse.
Make sure to add a provision that states that you and your partner agree not to assume each other’s debts throughout the marriage.
Additionally, clarify how debt incurred by you as a couple will be divided.
3. Create a Partnership or Operating Agreement
If you are not the sole owner, you may also want to consider having your business partners sign a prenup. It has become quite common for partnerships and operating agreements to require that unmarried shareholders get a prenuptial agreement before marriage.
These sort of agreements usually include the shareholder's spouses to sign a waiver of their interests in the business and a provision that stipulates that any transfer of share to the spouse must first be approved by all shareholders.
4. Maintain All of Your Business Records
In order to strengthen your prenup, it's essential that you have accurrate records of your business's transactions before and during the marriage.
These records will help to establish your earning capacity before the marriage and justify why the value of the business should be considered a separate asset.
Having well-kept balance sheets will also help prove to the judge that your marital property never intermingled with the business.
Limitations of a Prenup
Although a prenuptial agreement can be a useful tool to safeguard your business from a bad divorce, there are some limitations to its execution.
For instance, some couples make the mistake of drafting a prenuptial agreement with the same lawyer or without the spouse having their own counsel.
This often weakens the enforceability of the agreement and may even void it completely.
A prenuptial will also be limited if your spouse contributed their time or money to the company while you were married.
Any contribution they make may end up changing a portion of the character of the business to marital asset.
Similarly if any marital finances are used towards the business, a prenuptial agreement will hold less weight.
There are numerous other reasons why a couple should sign a prenuptial agreement.
Whether you have children from a previous marriage, are due a sizeable inheritance, have accrued a substantial net worth, still have unpaid debts, or own a business, a prenup can help prevent a nasty divorce and may even strengthen your marriage.