By Laurie Israel, Esq.
Congratulations on finding love and deciding to marry. If you’re a business owner, you may have some questions and some worries about what happens if your marriage ends in divorce.
Your business is your livelihood.
You are engaged in an active business. Perhaps you built it up from scratch. Or you may have joined a family business or purchased your business from another owner. Because you are marrying, you intend to support your spouse and possible future family with the earnings of the business.
When you enter into a marriage, you become a financial partner with your spouse. You are joining together with your spouse to form an economic unit. You may each be bringing different things to the partnership – you might be the primary wage earner, and your spouse the primary homemaker. But you are partners, nonetheless.
There is a concept in virtually all states that earnings from active participation in a business are marital property. Even the growth in the value of an actively conducted business is marital property in most cases. In most states, marital property is divided equally in the event of a divorce.
What happens if there is a divorce?
This is something you probably do not want to consider at this point. You’re getting married because you believe that your marriage will last a lifetime. But what if it doesn’t?
If one spouse owns and operates a business and the marriage ends in divorce, there are issues about the ownership and control of the business. Income earned from the business becomes an issue for purposes of spousal support and child support. Another issue that often arises in divorces is how to value the business for purposes of property division.
What happens if the income you earned in the business is a factor in valuing the business as an asset in a divorce? Will this income also be counted for purposes of spousal support and child support? Or will this be impermissible “double dipping” in a divorce action? And what is the income generated by the business for purposes of divorce – is it wages and self-employment income, or does it also include business profits? These are all thorny issues that can lead to active and prolonged litigation.
Business valuation.
Business valuation is a complex field. Disputes about the value of a business in divorce actions are frequent, costly, and can cause a divorce action to become protracted. Most businesses are not publicly traded, so establishing a value can be very difficult. With small businesses, the reasonable compensation of a business owner for his or her work needs to be separated from the ongoing business income produced by goodwill, other employees and business assets.
Because of this complexity, it is often preferable to have the business value determined through arbitration. The requirement of arbitrating this issue and how an arbitrator will be selected is a topic that can be included in a prenup.
Ensuring fairness to the non-business spouse.
You are getting married. You probably do not want to set up a financial contract before the marriage that treats your spouse unfairly if the marriage ends in divorce. Both of you will be contributing to the marriage, even if you are providing the lion’s share of financial support. The more sharing in a marriage, the more chance there is of the marriage’s success.
In virtually all states, income and growth of business value through active engagement in the business is viewed legally as a marital asset. One of the benefits of having a prenup is to create a plan in which your spouse’s interest in the value of the business that developed during the marriage is paid through other assets or by means of a promissory note with payments over a term of years. In this way, the business owner spouse can keep control of the business while also treating their spouse fairly.
Avoiding litigation.
Another advantage of entering into a prenup if you’re a business owner is that you and your spouse can choose the method of divorce, if there is to be one. You can employ out-of-court methods such as arbitration to address many issues, including valuation of the business. You can also decide on other alternative dispute processes such as collaborative law to resolve your divorce. Collaborative law is an excellent way to address complex cases without resorting to litigation.
Conclusion.
A prenuptial agreement can be a valuable tool if you have a business and you are marrying. It can provide predictability, clarity and fairness to you and your spouse.
© 2019. Laurie Israel. All rights reserved.
Laurie Israel is a lawyer who works with business clients planning for marriages. Her writings on prenuptial agreements have appeared in the New York Times, the Wall Street Journal, and the Huffington Post. She is the author of “The Generous Prenup: How to Support Your Marriage and Avoid the Pitfalls,” available on Amazon. She is a partner of Israel Van Kooy Law, LLC, a Massachusetts law firm. You can find her on twitter at @laurieisrael