Couples typically do not enter into marriage thinking about divorce, but, unfortunately, not planning for the possibility can oftentimes have serious consequences. Divorces can be difficult, and even more complex when business assets are at stake. For many business owners, the business itself is the individual’s most valuable asset. Business owners do not work hard to develop and grow a successful business, just to lose a portion of it during a divorce. Careful planning can help prevent this possibility, but the longer a business owner waits to take steps to protect a business, the more likely it is that the non-business owner spouse will be entitled to a share. Below are some steps for business owners to consider if they want to protect their businesses from a potential, or eventual, divorce.
Property Division in Virginia
In Virginia, in the event of a divorce, courts follow the equitable distribution method of dividing property. Under equitable distribution, courts will divide property “equitably,” or fairly, between spouses, but not necessarily evenly. Often, courts decide on a 50/50 distribution, but may choose a different distribution after considering the relevant factors. When dividing assets during a divorce, many factors are considered, including: the contributions of each spouse to the well-being of the family; the duration of the marriage; the ages and physical and mental conditions of the spouses; how and when assets were acquired; the tax consequences of dividing assets; whether assets are liquid or nonliquid; and the circumstances that contributed to the grounds for divorce. Courts can also consider other factors deemed appropriate to reach an equitable distribution.
The court may achieve the distribution by ordering a transfer of real or personal property, ordering the sale of assets, such as the marital home, and distributing the proceeds, and granting a monetary award from one spouse to the other.
Marital vs. Separate Property
In Virginia, a couple’s property upon divorce is classified as marital, separate, or hybrid property – part marital and part separate. Marital property is jointly-owned property and other property (other than separate property) obtained from the date of marriage through separation. Marital property is subject to equitable distribution during a divorce proceeding. Separate property is typically classified as all property acquired by one spouse prior to marriage or after separation, as well as property obtained during marriage by inheritance or gift (other than a gift by a spouse). Gifts from one spouse to another during the marriage are usually classified as marital property.
If an asset is part marital and part separate property, special classification rules apply to determine which portion of the asset is marital and which is separate. Only the marital portion of mixed assets are subject to equitable distribution. Courts will also classify and divide any marital debt the same way as marital property.
How to Protect Your Business From Divorce
- Form a Trust or Separate Business Entity – Placing your business in a trust can help protect it from the equitable distribution process during a divorce. If the business is placed in a trust, a separate entity owns the business and any business assets and can help ensure the business and its assets are considered separate, rather than marital, property. Similarly, forming a separate business entity, such as an LLC or corporation, creates a separate entity that owns the business assets. This strategy is more effective if the entity is created before marriage, but can still be a helpful strategy after marriage, but prior to divorce. However, it’s critical that marital assets aren’t used to pay for business expenses, or the business may still be seen as a marital asset, despite the separate entity.
- Utilize Marital Agreements – If spouses entered into a prenuptial or postnuptial agreement that set out the terms for property division, in the case of divorce, the couple’s assets, including any businesses, may not be subject to equitable distribution. Instead of having the court determine equitable distribution of assets and debts, the couple’s property will be distributed according to the agreement. Additionally, upon a divorce, spouses can enter into a property settlement agreement setting out the terms of their separation, including the rights, interests, and obligations of the spouses after the divorce. The agreement will typically establish what assets the parties classified as marital or separate and which spouse will receive which assets, or a portion thereof, after the divorce. If you have a business you’d like to protect in the event of a divorce, you should consider a prenuptial agreement, or postnuptial agreement if you’re already married, establishing that your business is separate property and will remain your separate property in any divorce proceedings.
- Distance Your Spouse from the Business – If your spouse is employed by the business or helps to manage aspects of the business, there is a greater likelihood that the business will be deemed marital property and that your spouse will be entitled to a portion of the business. If your spouse isn’t already employed by or engaged with the management of the business, it’s best to keep it that way if you’re looking to protect your business interests. If your spouse is involved with the business, you should try to ease them out as quickly as possible. The longer a spouse is involved with a business and the greater the role they play with the business, the more likely it is that the spouse will be entitled to a share (or larger share) of the business.
- Negotiate with Other Assets – During the equitable distribution process, not every asset is necessarily split 50/50. Instead, one spouse may retain full ownership of some assets and the other spouse keeps other assets. If your main priority is protecting your business interests, you may be able to sacrifice other assets, such as the family home or retirement assets, and retain full ownership of the business.
- Pay Yourself a Competitive Salary from the Business – If the business owning spouse chooses not to take a salary from the business, or takes a low salary, and instead reinvests all profits back into the business, the non-business owner spouse may have a better case of being entitled to a share of the business. While it may seem business-savvy to reinvest as much as possible, your spouse may have an argument that since you didn’t take a salary and contribute to family finances, they didn’t benefit from the business and are now entitled to a portion of the business.
- Avoid Using Marital Funds to Pay Business Expenses – It was mentioned before, but is worth repeating as its own tip. Using marital funds to pay for business expenses makes it more likely that the business will be designated a marital asset. Instead, keep good records of the company’s finances and avoid commingling funds.
Tools to protect your business are most effective if utilized before the marriage begins. Tools used after entering into marriage will be more effective the earlier implemented. If you wait until you or your spouse are considering divorce, it’s likely too late to try most of these methods, and instead the focus should be on mitigating the damage (such as sacrificing other assets to keep your business instead).
For more information about how to protect your business during a divorce, or about the equitable distribution process generally, contact our family law attorneys. Family law attorneys at General Counsel, P.C. are experienced in all aspects of property division, including negotiation and drafting of marital agreements and property settlement agreements. Call us today so we can help you protect your interests.