No one walks into marriage thinking, “I’m going to get divorced.” When we marry, we typically expect (or at least hope) that union will last for the rest of our lives. But the unfortunate truth is that more marriages than not end in divorce. While you may fare better if this is your first marriage – – first marriages have a divorce rate of “only” 41% – – by your second or third marriage, you’re looking at 60% and 75% divorce rates, respectively.
Even if you’ve made it through the mid-life crisis years, a study by Bowling Green State University has found that you aren’t out of the woods where divorce is concerned. The rate of divorce for couples over 50 has doubled in the past two decades. As if the divorce process isn’t hard enough to begin with, by the time you’re 50, chances are you’ve accumulated quite a few assets. If a business is one of them, you’re divorce just got a lot harder. Divorce for business owners is not only arduous but can be fatal to your business as well.
To protect your and your business’s future, take these precautionary measures well before the word divorce lawyer even enters your vocabulary:
- Sign a prenup
A prenuptial agreement, more familiarly known as a prenup, is a contract signed by a couple prior to marriage. The contract outlines their individual ownership of their assets in the event of a divorce. If done right, prenups can be business-saving when it comes to divorce for business owners. Here’s how to do a prenup right:
- Have both to-be spouses represented by their own attorney
- Make the agreement in writing
- Ensure its execution is voluntary for both parties
- Full disclosure is mandatory – A bit of pre-divorce advice: if you attempt to hide any assets during the prenup, you run the risk of invalidating it
- Make it reasonable – If later the prenup is found to be unconscionable (i.e. written with terms overwhelmingly in favor of the party with higher bargaining power), it could be invalidated
- Have witnesses or a notary present during the signing – Some divorce lawyers would even tell you to have a judge be your witness.
- Too late for a prenup? Sign a postnup
If you missed the boat on the prenup, you may get a second chance with a postnuputial agreement. A postnup is essentially a prenup signed after you’re already married. It can contain the same terms as the prenup, but keep in mind not all states recognize postnups. Likewise, postnups are invalidated far more often than prenups. Still, when it comes to planning for divorce for business owners, a postnup is better than nothing.
- Write a better operating agreement
Whether it’s a partnership, C-corp, or LLC, the business papers or operating agreement can be a major asset in divorce for business owners. Included in the agreement should be provisions which specifically address the ownership rights of divorced couples. Clauses to include are:
- A requirement that any unmarried shareholders provide your company with a copy of their signed prenup before marriage
- If a new owner joins who isn’t married, a requirement that the owner’s spouse-to-be sign a waiver of his or her future interest in the business
- A prohibition that states shares can’t be transferred without the approval of all parties (i.e. partners or shareholders)
- In the event of a divorce, the partners or shareholders reserve the right to purchase the interest of one or both divorcing parties so that the remaining owners can maintain control
- Pay yourself
When it comes to divorce for business owners, many people overlook this simple precaution: pay yourself a wage. Why? Because if you don’t take a salary, but instead reinvest all of your interest into the business, your future ex-spouse will have a better claim to his or her entitlement to your business. Since he or she derived no benefit from the business during marriage (because all of your money went into the business instead of the household), he or she can claim a right to it now that you’re divorcing.
Hopefully your marriage lasts until “happily ever after.” But in the event that it doesn’t, these four precautions can save you and your business from a lot of suffering.