Two tips to protect a business from divorce

These two tips can help reduce the risk of ruin to a business when an owner goes through divorce.

Businesses can suffer during a divorce. There are two ways entrepreneurs can protect their businesses: proactively and reactively.

Proactive steps: Protect the business before divorce is an issue

For those already owning business interests as they enter a marriage, it is wise to put together a prenuptial agreement that outlines how the business interests will be handled in the event of a divorce. If the business is established during the marriage, a postnuptial agreement can meet these same needs.

Another proactive approach involves the use of a trust. Forbes discussed this process, noting a domestic or foreign asset protection trust can transfer ownership of the property into the trust and shield it from a divorce. The trust becomes the owner of the business, instead of the individual, so the business can no longer be considered separate or marital property.

Reactive steps: Protect the business while going through a divorce

For those who are facing a divorce and did not implement these measures, the following tips can help preserve business interests:

• Separate finances. When starting a business, it is wise to keep business finances separate from personal or family finances. This reduces the risks of the business being considered a marital asset. This type of separation also serves a number of additional benefits, including potentially easing the burden of determining business expenses during tax season. It also helps establish with the Internal Revenue Service that the business is a business and not just a hobby.
• Pay yourself, not your spouse. A recent article in Entrepreneur noted that business owners should pay themselves a reasonable salary instead of “starv[ing] the family’s cash flow to build the business.” If this is done, it will weaken any argument that the ex-spouse should have a share of the business. It is also wise to avoid having a spouse actively involved in the business. An ex will have a strong case that he or she has ownership in the business if there is a long history of involvement in the business.

Business owners can employ additional strategies if those listed above are not successful. Other assets could be traded, for example, in an effort to retain full ownership of business interests. This could include letting the ex have full ownership of the family home or giving up a larger portion of retirement assets.

Since assets are often adjusted during the property division determination of the divorce proceeding, it is important to get an accurate valuation of the business. It is wise to get two valuations: one from a neutral, court-appointed professional and a second from third party. This will help to better ensure the assets are divided fairly.

Importance of legal counsel

These are just a few tips to help protect your business during a divorce. Depending on the details of your situation, other options may be available. As a result, it is wise to contact an experienced business valuation attorney to discuss your unique situation and better protect your business interests.