What Happens to a Business in Divorce – Gloria Petroni Law Podcast | Direct Discourse
What Happens to a Business in Divorce
Understanding how divorce can impact your business is crucial. After all, your business is one of the most valuable financial assets you own. Gloria Petroni will share a few precautions to take to avoid serious damage to your business or financial situation, or having to be in business with your former spouse.
- Depending on your individual circumstances, your spouse may be entitled to as much as 50 percent of the value of your business in a divorce, because community property, which is all assets that spouses own together, is divided equally.
- Many business owners scoff at the idea that their business has value, saying the business is them, and without them, there is no value. That is not the case in divorces. Many sole proprietorships have values as determined by a business valuation expert.
- Add the business and all processes associated with it to a prenuptial agreement. A “prenup” is a contract signed by both parties prior to the wedding that outlines what their property rights and expectations would be if the marriage were to end in divorce.
- Prenups can be a powerful tool in protecting your business in a divorce. Well-drafted prenups can nullify both Community Property and Equitable Distribution State laws. All prenups should include
- Entire agreement needs to be in writing
- All parties voluntarily agree to drafting and signing the prenup thus waiting until the last minute before the wedding occurs is strongly discouraged
- All assets and liabilities must be fully disclosed
- Must be executed by both parties
- Strongly suggested that both parties have independent counsel
- If a prenup doesn’t include any of these, it can be considered invalid. By using a prenup, both parties can decide in advance what property will be considered separate property and what property will be considered marital property and how that marital property should be divided. If a prenup is not possible, look into a postnuptial agreement, which is a written agreement executed after a couple gets married. This agreement works the same way as a prenup, outlining the division of assets if a separation or divorce should occur.
- A Partnership, Shareholder, LLC or Buy-Sell agreements are other possible solutions to protecting your business in a divorce. These agreements should include various provisions that would protect the interest of owners if there is a divorce. Provisions can include requiring a prenup for unmarried shareholders or a prohibition against the transfer of shares without the approval of the other partners or shareholders.
- If you weren’t able to adequately protect your business and now your former spouse is entitled to an ownership interest, there are a few options to pay him or her off if being business partners is out of the question which is generally the case in a divorce.
- Use your share of the marital assets. This can include cash, stocks, retirement funds and real estate.
- Use a Property Settlement Note, which is a long-term payout with interest, that is the amount your ex-spouse has in their share of the business
- The last option is selling the business and dividing the sales price. Understanding this is least preferred, it may be the only option.
- Read more about estate planning: http://petronilaw.com/what-happens-to-a-business-in-divorce/
- Gloria Petroni of Petroni Law Group has more than 30 years of experience in divorce law, estate planning, probate, business and real estate matters.
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