A divorce can be a pretty rough situation for anyone to go through. There are a lot of aspects to it that are all personal and unique for everyone. It can also very negatively reflect on someone’s livelihood. People, no matter the gender, can find themselves in a divorce with a substantial business on the line because of it. Worldwide, the average rate for divorces is hovering around 50% per cent mark. Not only that, the rate for second and third marriages is even more bleak, progressively. Factor in all the work, energy and time that goes into building, running and managing a company and you have a very shaky ground to build a solid relationship on.
There are strategies to help preserve a business from being dissolved by marriage law. Note from the start, there is no way to completely protect all assets from a potential divorce. But we will go over all that you can do in order to minimize the risk associated with a divorce.
The prenuptial agreement
To start off things with a pre-marriage cautionary action, prenups are the first thing to consider. Prior to a legally binding union between two individuals, a preemptive contract can be made between said individuals with the services of lawyers. This contract clearly defines the company and business as a separate piece of property and will be exempt in any legal proceeding in the event of a divorce. For such an agreement to be legally valid, both parties need to accept the terms and conditions with the presence of their individual lawyers.
Prenups are always done in writing. It needs to be thought of, done and signed with no coercion of forceful persuasion. In other words, it must be voluntary of the part of all parties involved. Full disclosure of assets and liabilities is necessary in front of a third party such as the judge. Such contracts used to be foolproof, but are not so much so as of late. Things can get shifted around and convoluted like when a business gains value during a marriage. The lines get blurred there as it cannot be treated as a separate property anymore. Still, it is better than having nothing. Making a solid prenuptial agreement that suits all parties involved is a delicate process that leaves no room for errors. It is highly recommended to consult reputable family law experts in the making of a prenuptial agreement.
A business can be protected if we place it in a company or a unit trust. There, trust’s interests are fixed and held in accordance with the units. Think of shares in a company. Every individual family member has an interest in that company in the form of a discretionary trust. Let’s say that two partners own 50% of the units, each. In the event of a divorce, an ex-spouse can have half of the interest but cannot interfere with the operation of the business on their own. It is a loss-saving measure more than an iron shield from a divorce, but a valid tactic none the less.
Distinguishing between personal and business finance
If that is not already the case, your business and personal finances need to be clearly separated. It may sound like common sense, but for many, it is not that apparent at first. Avoid acquiring personal assets such as cars or vacations and filling them as “business expenses”. Limiting personal expenses paid through business accounts and borrowing from personal accounts and assets to fund the business is crucial. Failing to do so can muddy the waters between personal and business finances which in case of a divorce can bode very badly for the parties involved.
Keeping business and family separate
By now, we can see the trend. The more we separate the business from the rest of the family, the better. Appropriate planning can be done in such a way to structure the company such as to minimise or outright avoid the potential risk of claims on it. Business assets such as premises, equipment and intellectual property can be separated from trading activities through the use of holding entities, licensing and registered security interests.
It is important for any serious company to keep tight records on all business operations and activities. Apart from things like future reference and tax inspections, accurate records are needed for transparent financial information to be readily available in case of a divorce. If it can be proven that the growth of a company has been achieved before the marriage, it may aid in our favour.
Much like a prenup, a postnuptial agreement can be made to further solidify your assets. Actually, it is most often advised to do prenups and shortly after, a postnup in conjunction with one another for maximum effect. An early postnuptial agreement is the best kind. If such an agreement is signed long before a marriage ends, preferably several years time, it can be very useful in separating the business from further development. Courts tend to look at postnups very sceptically if they are signed by themselves. But combined with a prenup, it makes for a nice combination.
These agreements define what transpires if the business in question changes owner status, such as one that could occur in case of a divorce. It can limit an (ex) spouse’s ability to acquire ownership, deprive the partner of their voting rights and provide the other partners with the mandatory right to buy their share at a low, previously set price.
No matter what option we decide to go with, it is important to be prepared for all cases and eventualities. A marriage can be a beautiful life experience. Still, one must think a couple of steps ahead and plan for a possible change of heart and mind on either side of that union. The effectiveness of all steps we can take stems from early action, well ahead of any problems arising. An ounce of prevention is worth a pound of cure.