According to the American Small Business Administration, 90 percent of all businesses are family owned. While divorce rates are actually dwindling far below the mythical quoted number of 50 percent, many family businesses are placed in jeopardy every year as a consequence of divorce. In your attorney search, be clear that you are looking for a divorce lawyer or family law attorney to assist you with divorce papers (premarital agreement).
Since California is a “Community Property” state, anything earned during a marriage can be counted as shared assets during a divorce. Even businesses started before marriage can have their earnings or increase in assets potentially divided with the spouse, according to how much the business grew during the marriage.
Since these laws can create a sticky situation, many business owners want to know “What are my rights when it comes to divorce and my business?” To help protect them either before or during divorce, here are some steps commonly taken by business owners:
Arrange a Premarital Agreement
Called a “prenuptial” agreement in many states, these documents work just like a partnership contract for a business formation would. Both parties get to state what they own and how assets will be divided during marriage. According to Inc. magazine, a sound premarital agreement is:
●Made well before the wedding day while both parties are of sound mind and not under coercion
●Signed in front of witnesses or a notary
●Created with full disclosure of assets, holdings, and intended financial moves
●Not “unconscionable” or completely unfair to one party beyond reason
Failing to meet these requirements could place the premarital agreement under suspicion or invalidate it. Parties can protect the agreement further by creating a clause that upholds the agreement even if certain sections are made invalid by one or both of the spouses’ actions.
In your attorney search, be clear you need a contract expert to evaluate the premarital agreement. This can help prevent vague language or stipulations that are difficult to uphold. Post-marital agreements can also be made, but these documents usually do not hold as much water because the stakes are different once people are married.
Structure Your Business to Be Insulated from Internal Conflict
Much like a premarital agreement, the business charter can reflect the company owner or owners’ assets in the future should the situation become rocky. Forming an LLC or a corporation to make the business holdings separate from personal holdings is one of the easiest ways to protect yourself. A partnership agreement can also take into account dispute resolution and have provisions for members being able to buy out owned shares to protect the rest of the business.
Keep in mind that just like premarital agreements, the partnership agreement can be invalidated if partners do not act according to the letter of the document. Furthermore, if assets like company cars are purchased out of personal accounts, the line between corporate and community assets becomes blurred and the charter may be discredited based on such evidence.
Charters should be reviewed by a contract law expert, and business owners should exercise diligence to track expenses and keep personal and professional boundaries separate.
Reach an Agreement
Even if a business falls squarely under community assets, there are still steps an owner can take to prevent it from unraveling. While California law generally splits joint assets down the middle, it does not obligate spouses to split every asset in such a way. In other words, someone can use a tradeoff to pay the equivalent value of the business owed without having to parcel up the business or sell the business to a third party altogether.
Entrepreneur magazine recommends raising needed capital by selling minority stakes through employee stock ownership plans. Alternatively, the owner could form a trust to prevent business assets from entering the table during divorce proceedings.
Another recommendation they make is not placing all of your earnings back into the business where they will be harder to extricate. Instead, business owners should always pay themselves a “competitive” salary to simplify matters.
California Divorce Attorney
In general, preparing in advance of divorce with crystal clear contract language, transparent asset declaration, and diligent accounting practices can make questions easier to answer during a divorce. Partners should also be aware that debt can be shared just like assets are, so even the partner not interested in the business’ earnings has a reason to protect themselves.
Taking these measures is not a guarantee of any sort of results, and all divorce proceedings unfold on a case-by-case basis. You can learn more about how to help separate business and private assets and resolve disputes for your own situation by consulting an expert San Diego divorce attorney.
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