Guarding Your Assets: Use Prenuptial Agreements to Protect the Business
Nothing kills romance like talking about divorce. But family business owners should cozy up to the idea of prenuptial agreements to protect their business assets.
A prenuptial agreement is a legal agreement between spouses-to-be signed before the marriage to dictate the division of assets in case of divorce. By signing a prenuptial agreement, the parties agree to which assets should be kept separate and which should be considered marital property.
Drafted properly, a prenuptial agreement is a powerful legal contract that can facilitate division of property during the highly emotional time of a divorce and can even override division-of-property laws in states that recognize community property.
For business owners, a prenuptial agreement can protect the business from potential problems caused by a divorce. For example, if you started your business before you were married and you have no prenuptial agreement, your spouse is likely entitled to half (or more) of any appreciation in value that the company experiences during the marriage.
If you need to give your spouse half of that appreciated value, you might have to make drastic changes to your business model, or even sell the company to make the payment.
How to Structure
The prenuptial agreement should not only dictate decisions made about the business but also cover other pre-marital assets.
If you agree to characterize your business as a separate property, this will help to prevent sharing the appreciated value. The same goes for the appreciation in value of other assets, say artwork or real estate, that one party owned before the marriage.
Don’t overlook debts: Some states consider debts to be community property, so business debt or school loans might be the responsibility of both spouses.
It is imperative that the two parties use separate lawyers to represent them in drafting the agreement. If you use the same lawyer, the agreement might not be enforceable.
Also, if the non-owner spouse contributed to the growth of the company, either by contributing time, expertise, or money, the business could be considered a marital asset. The same is true if marital funds were used in the business.
In addition, you must keep detailed business records to prove the business’s condition before the marriage and also prove its value at the end of the marriage.
Finally, a prenuptial agreement is just one of the important documents business owners need to protect the company. For example, owners should have a buy-sell agreement in place to ensure that a spouse doesn’t become a partner in case of the owner’s death or disability.
Condition of Employment
If you have family members who are working for or may want to work for your company, requiring a prenuptial agreement before they marry can be part of your family employment policy. Making it a requirement takes the onus off the family member to explain the necessity of the agreement—it just becomes part of the deal when marrying into your family.