When the idea of divorce is on your radar, it’s important to think about how it will affect your company. It’s not uncommon for a spouse to want ownership or control over part of the other person’s company during the process, which can be done in many different ways.
This article discusses some of those methods and what you can do to protect your business during a divorce.
Have a Prenuptial or Postnuptial Agreement in Place
To protect your company, it’s best to have an agreement drawn up before any legal proceedings are taken. Prenuptial agreements are done prior to getting married and will list out all of the property that each party owns coming into the marriage, making it clear that any property acquired after the Prenuptial agreement is presumptively community in nature, belonging equally between spouses.
A postnuptial agreement would be drawn up after the marriage takes place and should state the character of all property owned as of the date of the Postnuptial agreement (i.e. marital or community property vs. sole and separate property.) Property can be acquired during the marriage, using sole and separate funds, making the asset or business a sole and separate asset or business).
Prior to the filing of the divorce, it is best to review your official company documents, like your operating agreement and company profile with the Arizona Corporation Commission. Oftentimes people don’t keep those documents up to date and that can cause additional issues in a divorce. You will also want to review your company finances to make sure things are in order and current.
Communications About Your Company
If you have any thoughts or concerns about how you want your company protected in case of a personal event, such as the marital separation process, death, or disability–especially if they are not covered by insurance–then make this known to those who will need to know when necessary and make sure your company documents are up to date. You may also need to update your Estate Plan.
Buy Out of your Spouses Interest in the Business
If you have a community business and need to buy our your soon to be ex-spouse, you may want to give up your interest in other assets such as real estate investments, art collections, off-road vehicles or toy haulers, and other personal property that could be sold off or used as part of the equalization of assets for distribution.
Sell a Stake in the Company to Raise Capital
If the company is worth more than you are able to cash flow a buyout, selling part of your stake, while not typically desirable, can be an option. Selling a stake in a company can be done either as a sale to an outside party or by taking on new investors. We can refer you to a trusted local lawyer experienced in handling these types of transactions.
Convert Liquid Assets into Business Equity
When dealing with assets, a more common (and more desirable) approach is converting them into shares and giving up ownership but retaining voting rights. This can mean getting loans from family members and friends willing to invest their money at interest rates lower than what banks charge. It also means possibly creating new equity through a crowdfunding campaign that offers stock options and perks only available exclusively to backers.
Keep Your Company Separate from Personal Finances
It goes without saying, but don’t mix personal and company finances. The business valuation process is usually time-consuming and complicated enough for most people (particularly busy entrepreneurs), without having to bring in a forensic expert to sort through the company’s financial history.
Don’t Mix Company Credit Cards with Personal Ones.
Again, it goes without saying, don’t use the company credit card for all of your personal expenses. Even though it can be tempting, resist this urge. Clean accounting records will make it easier if a marital separation does happen because there are clear records of what was purchased on which accounts (business v. personal).
Make sure your spouse has their own separate personal credit cards, too, so the same logic applies rather than just one person carrying around both types of cards and risking mixing them up at some point down the road when the intermingling of finances may become unmanageable.
If You Have to Part Ways
Take steps to protect the company’s identity. If you have employment contracts with key employees, are they up to date or subject to renewal and renegotiation in the near future? This may affect when you want to file. Have key employees signed Non-Compete Agreements and Non-Disclosure Agreements? You want to make sure these are all current prior to filing a separation proceeding to keep your key employees in place, everything running smoothly, and your proprietary information secure.
In conclusion, these are a few of the steps to take to protect your company prior to and/or during the separation process. With the right strategies in place, you should be able to maintain your relationships with employees and customers, even if your soon-to-be ex-spouse takes action to thwart that effort.
A divorce can change everything. You may have been married for a long time, but you don’t know the person you are about to divorce. You’ve never met that person. So, don’t assume the way things have gone in the past is the way things will go in the separation process. Even if everything is going to be amicable, there is no reason to not start looking at documents you may not have seen for years to reacquaint yourself with what is already down on paper. It’s helpful to be proactive.