Typically, couples do not consider divorce before getting married, but regrettably, failing to prepare for the potential can frequently have major repercussions. Divorces can be challenging, and they become significantly more complicated when business assets are involved. Many business owners consider their company to be their most significant asset. Business owners don’t put a lot of effort into starting and expanding a prosperous company merely to lose some of it in a divorce. Careful preparation can lessen the likelihood of this happening, but the longer a company owner waits to protect their company, the more possible it is that their spouse, who is not a business owner, will be entitled to a share.
If business owners want to safeguard their enterprises against a potential or final divorce, they should think about the procedures listed below.
Prenuptial and Postnuptial Agreements
One of the best methods to safeguard your business interests through a divorce is by having a marital agreement. Most people who have a business before getting married will do so with their spouse in a prenuptial agreement to protect it in the case of a divorce. Similarly to this, if a business is created after the marriage, some couples create a postnuptial agreement that identifies the company as the individual property of one spouse and/or specifies how the company would be handled in the event of a divorce or separation. To put it simply, if you want your company to continue unharmed, you must establish a financial plan to guard your assets, and this is a great way to do so. When creating a prenuptial or postnuptial agreement, you must engage a lawyer. Throughout the procedure, both parties should hire their attorneys. The marital contract may not stand up in a divorce if the judge finds that it is not legally binding or that it unfairly disadvantages one partner in favor of the other.
It is not unusual for someone to later question the legality of a marriage contract after regretting signing it. Because of this, you should inform your lawyer of any prenuptial or postnuptial contracts that mention your company so that they can be accurately reviewed and, if necessary, defended.
Create a Separate Business Entity or Trust
By putting your company in a trust, you can shield it from being fairly divided in the event of a divorce. If the company is put into a trust, a distinct entity will hold the company and any related assets, which can help to ensure that the company and its assets are treated as independent property rather than marital property. Similarly to this, establishing a distinct business entity—like an LLC or corporation—creates a distinct entity that is the owner of the company’s assets. This tactic works best if the entity is established before marriage, although it can also be useful after marriage before the divorce. To avoid the business being viewed as a marital asset despite being a separate legal entity, it is crucial that marital assets not be utilized to cover business expenses.
Consider Your Spouse’s Involvement in Your Business Carefully
There is a higher possibility that the business will be declared marital property and that your partner would be entitled to a piece of the firm if your spouse works for the company or assists in managing aspects of it. If you want to safeguard your business interests, it’s better to avoid including your spouse in the management of the company or as an employee. If your spouse works for the company, you should strive to get them out as soon as you can. The likelihood that a spouse will be granted a portion (or a larger share) of the business increases with the length of their involvement and the extent of their contribution to the business.
Pay Yourself a Competitive Salary from the Company
This fact is frequently ignored. Your soon-to-be ex-spouse may argue that he or she is entitled to much more money or a larger share of your business if you don’t pay yourself a competitive salary but rather put everything back into the company rather than the family. This is because he or she won’t have benefited from the fact that all of your money was invested in the company rather than the family. Reinvesting as much as you can sounds business-savvy, but your spouse may argue that since you didn’t receive a salary and made contributions to the family budget, they didn’t gain from the company and are now entitled to a percentage of it.
Include Other Assets in Negotiations
You would have to give up other marital assets if you needed to keep full ownership of your company.
Prioritizing what is most important for you to hang onto and how to best relocate the assets to accommodate is crucial because most provinces attempt to divide marital assets equally, including your company.
Not all assets are necessarily divided equally throughout the equitable distribution procedure. Instead, one spouse can continue to be the sole owner of some assets while the other spouse preserves control of others. If safeguarding your business interests is your priority, you might be able to part with other assets, such as the family house or retirement funds, while still keeping full ownership of the company.
Do Not Use Marital Money to Cover Business Expenses
Although it was already noted, it deserves a separate recommendation. It is more unlikely that the firm will be classified as a marital asset if marital funds are used to cover business expenses. Instead, maintain accurate financial records for the business and refrain from combining cash.
Consult Your Attorney for Advice
It can be very challenging for a business owner to understand what to do during a divorce. Having your personal life directly impact your business can be incredibly upsetting. You need to exercise caution in how you respond to the circumstances. When it comes to safeguarding your company during your divorce, your attorney should be your first port of call. A knowledgeable lawyer can address your concerns and guide you through the entire procedure.
It is obvious that the situation is challenging and that going through a divorce as a business owner can be stressful, but with the correct resources and knowledge, you can safeguard what is important.