In California, if you owned a business before you got married, it is possible that your spouse will acquire a legal interest in your company by virtue of your marriage. This is true regardless of what your company’s organizational documents say about ownership and management rights, as California’s community property law can override written agreements regarding privately-held business interests (as well as other types of assets).
But, prenuptial agreements (or “premarital agreements”) are an exception to this general rule. If you enter into a valid prenuptial agreement, the terms of your agreement will control over any countervailing principles of community property. As a business owner, entering into a prenuptial agreement is the best way to avoid confrontations during your marriage and in the event of a divorce; and, with a tactful approach, you can present it as a desirable option for your fiancé as well.
Using a Prenuptial Agreement to Protect Your Privately-Held Business
While a prenuptial agreement establishes legal rights and restrictions, it also serves to set appropriate expectations. By working through the process of preparing a prenuptial agreement, fiancés can often identify potential issues before they lead to conflicts. With regard to protecting an interest in a privately-held business, some of the key provisions of a prenuptial agreement will typically include:
- Ownership of Member Interests, Partner Interests, or Corporate Shares – As a general rule, any assets owned prior the date of marriage are considered “separate property” under California’s community property law. This means that they are not subject to distribution in a divorce. However, there are circumstances that can transform separate property into community property, and any additional ownership interests acquired during your marriage (i.e. if you buy out a partner) will qualify as community property in the absence of a prenuptial agreement. To avoid any question as to whether your spouse has acquired an ownership interest in your company, you can address both your current interest and any future interests in your prenuptial agreement.
- Management and Control – In a privately-held business, management and control rights are not necessarily limited to owners of the company. If your spouse takes on an active role in the business during the marriage, either formally or informally, this could give him or her grounds to claim an interest in the business in the event of a divorce. To address this concern, you can include provisions in your prenuptial agreement that clarify your exclusive ownership regardless of any contributions from your spouse.
- Company Assets vs. Salary and Distributions – Unless you run your business as a sole proprietor (i.e. you have not formed a partnership, corporation or limited liability company (LLC)), your business assets should belong to your company, not you personally. To ensure that your spouse cannot seek a share of your business assets under California’s community property law, you can include appropriate acknowledgements in your prenuptial agreement (in addition to following appropriate business recordkeeping practices).
- Liability for Individually-Incurred Debts – While an appropriately-structured corporation or LLC should insulate the company’s assets from personal liabilities, there are exceptions, and there is a legal mechanism known as a charging order that allows personal creditors to place a lien on business ownership interests and collect from an owner’s distributions. If your fiancé is currently in debt, or if he or she may incur debts during your marriage, you can use your prenuptial agreement to limit your exposure (though you will still need to be careful to avoid signing onto any liabilities as a joint debtor).
Request an Appointment with North County, CA Family Lawyer Richard M. Renkin
If you own a business and would like more information about using a prenuptial agreement to protect your company, you can call (888) 837-3564 or contact us online to request an appointment with Certified Family Law Specialist Richard M. Renkin. With offices in Encinitas and San Diego, we represent business owners throughout the North County area.
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