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How to Protect Your Business from Divorce

How to Protect Your Business from Divorce

April 02, 2024

Divorce is not a pleasant topic, and no one goes into marriage with plans for its dissolution. But if you own a business — especially if you’re a part of a partnership — it’s important to take steps now to protect your business from divorce. Hopefully you’ll never find yourself in that position, but if you do, you’ll have one less stressor to worry about.

In this post, we’ll cover how to protect your business from divorce prior to any divorce proceedings taking place. This post will not cover how a business is divided during a divorce.

Is a spouse entitled to business assets during a divorce?

Community Property States

If you live in a “community property state” and started your business after you got married, the answer is yes. Community property state law dictates that any assets or debts acquired during a marriage — by either spouse! — must be divided equally in the event of divorce.

As of 2024, there are currently 9 community property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Alaska, South Dakota, and Tennessee have “opt in” community property law. That means that if both parties agree to it, assets can be divided equally.

Common Law Property States

The remaining 41 states rely on the concept of “common law property.” How then, do assets get divided during a divorce in common law states?

This is based on the concept of “equitable distribution” — meaning that assets will be divided fairly, but necessarily equally. If a court must get involved in dividing assets, the judge will consider things like each spouse’s financial wellbeing, earning potential, alimony obligations, personal property value, age, health, and more.

How do you protect your business from divorce?

There are wise steps you can make now to ensure that you protect your business from divorce, should you ever find yourself in that situation.

Create contractual agreements

The most watertight way to protect your business from divorce is contractually — through a prenuptial or postnuptial agreement. Sure, it’s not romantic, but it could potentially save you significant mental, emotional, and financial stress should you face divorce.

In almost all instances, a prenuptial or postnuptial agreement overrides community property laws.

Get your paperwork in order

Make sure all organizing documents establish yourself as the sole owner of the business. (See our note on partnerships below.) You can also include stipulations in these organizing documents that the business cannot be transferred due to divorce. Work with a law or tax professional to cover your bases in any legally binding documents.

Keep personal and business expenses separate

Not only will this help protect you in the event of a divorce, this is just a smart business practice. Keep your personal and business expenses separate, including bank accounts, credit cards, and lines of credit. It’s also important to keep your books clean, too. We recommend hiring a trustworthy bookkeeper to manage this for you.

Do not hire your spouse to work for the business

If your spouse works in the business in any capacity, that can potentially muddy the waters during a divorce proceeding. If your spouse must work for the company, make sure to pay them a “market rate” for their work. If not, they may have grounds to seek a higher share of the company on the argument that their work contributed to the company’s value.

What if your business is a partnership?

It is especially important to have contractual agreements in place to protect business interests should a partner face a divorce. A strong partnership agreement should include anti-assignment provisions, dictating that a partner cannot assign his or her business interests to a third party. This provision would apply to a spouse during a divorce.

A buy-sell agreement is another important tool for outlining how a business should proceed in the case of divorce of a partner, as well as illness or death.

Start now to protect your business from divorce

It’s important to put these measures in place prior to divorce proceedings. Work with a Landmark financial advisor to ensure your business is protected.

Important: The information we’ve provided in this article is not intended as tax or legal advice. Please consult legal or financial professionals for guidance regarding your individual situation.