No one plans to get a divorce, but ending a marriage is common. About half the marriages in the U.S. end in divorce. As a business owner, you might have asked your spouse to sign a prenuptial agreement to protect the business. Or you could have drawn up a partnership agreement with a buy/sell clause that protects your soon-to-be ex from taking over the business.
If you did not take any of these measures, do not panic. You still have ways to protect your business during a divorce.
Understanding community property
Louisiana is a community property state. All property owned by a couple during the marriage will be presumed to be community, that is, owned together by the two of you, and the burden of proof is on the person claiming they own separate property. When couples divorce, their assets are viewed as community property, and debts are considered community liabilities. To the extent that the parties’ assets are worth more than their debts, those assets will be split in half. Your former partner receives half of the marital assets.
Marital assets are all the property you acquired during the marriage with a few exceptions. Generally, inheritances received while married are not marital property. Gifts by others to the married couple are presumed to be community, but gifts or donations specifically given to only one of the spouses will be separate property. Money received for claims or lawsuits for injuries will belong to the person who was injured. Separate property spent during the marriage will be presumed to have been spent for community purposes, and may give rise to reimbursement claims when the parties divorce.
If you owned your business before you and your ex married, you may think you are in the clear. However, if your business increased in value during the marriage, which presumably it has, then the equity it has gained may be subject to division.
Strategies to protect your business
Obviously it is best to make any protections for separate property prior to marriage, when it can be transparent and may be more easily understood by your intended spouse. After the parties are married, any strategic planning on the part of one spouse will hasten mistrust between the parties and may bring about the divorce itself, so be aware of that if you intend to strategize after you are already married. If you are going to counseling or are attempting to save your marriage, strategic planning for divorce will be counter to those efforts.
Pay yourself a market rate salary
To counteract a spouse’s claim to a business, you can do a few things. If you were not previously, you need to start paying yourself a reasonable salary. That is because all money received because of your “effort, skill and industry” during the marriage is community property. If you are investing all the money back into the business, you will get in trouble when it comes to property division. According to the National Federation of Independent Business, your former spouse can justifiably claim that very little of your income supported the household. If your ex had a significant role in supporting not only your life together but also supporting your business, they will have a more viable claim on the increase in value of that business, and a reimbursement claim for the value of uncompensated labor that benefited a separate business.
Move your spouse out of an active role
If your spouse works for the business, they should be compensated fairly for the value of their labor as well, in order to avoid the same kind of reimbursement claims you avoid by paying yourself a salary. If the divorce is inevitable, you may need to let him or her go or move him or her to a less important role. After you do so, you want to document your role within the company, and your ex’s lack of involvement. This will create some distance from your former spouse, and his or her role supporting your company.
Negotiate for the business by giving up other assets
If you intend to try to keep a separately owned business, you can negotiate by using other valuable assets to set off against the value of the company. Remember, your spouse may not actually want to run or have your business, but simply wants to be fairly compensated for community assets.
Sometimes community property is sold, and the proceeds are divided evenly. This is done when the former partners cannot agree on how to divide assets. If you are trying to keep your business you may offer cash from a 401(k), the equity in the family home, or other assets to compensate your spouse and maintain your business. The business may have potential value, not yet realized, that can be maintained by the person with the skill to run it property. Tax and market issues must also be considered.
Before you consider entering negotiations with your soon-to-be ex, consider reaching out to an experienced family law attorney. An attorney can advise you of the best way to protect your business.