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In this edition of Ask General Counsel, we discuss how business owners can (and should) protect their business before (and during) a divorce.
If you don’t want to read this article, you don’t have to. . . . instead, you can watch a webinar in which General Counsel, P.C. attorneys Joanna Foard and Evan St. John discuss How to Protect Your Business in a Divorce.
If you are still reading, you are likely a business owner and may be contemplating divorce. For many business owners, the business itself is the individual’s most valuable asset. Careful planning can help you protect your business. Below are some steps from Foard for business owners to consider if they want to protect their businesses from a potential, or eventual, divorce.
1. 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. 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.
2. 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.
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.
3. 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.
4. 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.
5. 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.
6. Avoid Using Marital Funds to Pay Business Expenses (and vice versa) – Using marital funds to pay for business expenses (and vice versa) 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.
In our next Ask General Counsel article, we will discuss how to protect a business with multiple owners when one of the owners goes through a divorce. For a sneak peak, you can review this article, Corporate Issues In Divorce – Avoiding Divorce Issues Among Equity Holders, written by General Counsel, P.C. Senior Corporate Associate, Evan St. John.
Based in McLean, Virginia, since 2004, General Counsel, P.C. has been representing businesses, non-profits, and individuals throughout the Washington, D.C. Metro Area (and beyond) with the following practice areas: Business Law, Employment Law, Government Contracts, Litigation, Family Law, and Estate Planning.
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