Approximately 40% of marriages in America end in divorce…
Yet, when we start a business, how many of us really think ahead to what a potential divorce could do to our business?
A divorce can have many of the same ill effects on your business that your death or disability would have.
The best way to avoid these consequences is to plan ahead.
Here are a few things to think about:
1. Do You Live in a Community Property or Common Law State?
State law usually determines the rights and obligations you have in divorce settlements. Community property states usually require that all property of the marriage be divided equally. Common law states allow the court to supervise an equitable division of property. Some things to think about are whether or not the property in question was purchased, received as a gift or as an inheritance. The court will also look at whether both spouses made contributions to acquire or increase the value of the property, in this case, your business.
2. Who Owns the Business?
If you own a business and you are about to divorce, you need to talk to a good business lawyer as well as a divorce attorney. In order to figure out how your business interest may be divided, you need to determine who actually owns the business and what contributions were made by the non-owner spouse. If you are joint owners of the business, you need to decide how you will proceed (i.e., whether you will buy your partner out, sell the business outright, etc.)
3. Determining the Value
Obviously, one of the first orders of business will be to establish a value for your business interest. In most cases, you will need an accredited appraiser. This can be costly so be prepared.
Sometimes it can be difficult for both spouses to agree on a value for the business. The one who wants to keep the business will want a low value; the one who wants to be bought out will, of course, want a higher value.
4. Plan Ahead
Prenuptial agreements aren’t for pessimists; they’re for pragmatists. If you own a business and you’re planning to marry, one of the smartest things you can do is discuss a prenuptial agreement with your future spouse. Even if you opt not to go the prenuptial route, you should at least have a post-nuptial agreement in place that spells out whether or not your future partner has any right to the business in the event of divorce. If your partner won’t fully release any rights to your business, the agreement should at least determine how the business will be valued, set out a buy-sell agreement for the business, etc.
5. Taxes, Stocks and Retirement Assets
After you’ve established how much your business is worth, you need to include your business lawyer or accountant in any further discussions about how the property is to be divided. There can be significant tax penalties if the property or assets are not transferred correctly.
If you have an IRA and have to transfer part of it to a former spouse as part of a divorce settlement, it’s a non-taxable transaction.
Ending a marriage can be difficult. When you have a business to consider, the difficulty is only magnified. To minimize the impact on your business, you need to plan ahead.