Got a Business? Get a Prenup

Posted on June 5, 2014 in Planning & Advisors

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If you don’t work out how to handle your assets ahead of time, a divorce could devastate your company.

Business owners look forward to “prenups”–whether with a spouse or a business partner–with about as much eagerness as a rectal exam. Sure, it’s necessary, but it’s often unpleasant and something you’d rather skip. Some people do– avoiding the doctor for that reason.

But those exams can uncover serious health situations that, if left untreated, could wreak terrible damage. Same goes for not having a prenuptial agreement. If there’s a divorce and you haven’t worked out how to handle your assets, the damage inflicted on your company could be devastating.

What, Exactly, Is a “Prenup”?
Essentially, a prenuptial agreement (“prenup”) is a contract between prospective spouses that addresses how the financial aspects between them will be handled in the event of a divorce. All 50 states recognize prenuptial agreements. Some states honor “domestic partnership agreements” between unmarried people that cover similar issues. Your company will be among the most important financial assets you’ll want to address.

Why Should You Care?
The statistics aren’t encouraging: Almost half of all marriages end in divorce, and approximately 40 percent of marriages include a spouse who has been married before. This can make for complicated financial issues. Discussing this decidedly unromantic topic with your intended can feel like pouring a bucket of cold water over your wedding plans, or raise concerns about the level of trust or commitment between the partners. In the long run, to paraphrase Friedrich Nietzsche, what doesn’t kill you makes you stronger as a couple. Discussing the terms of a prenup can open up sound pathways for communication about family finances that will serve you well throughout your life together. And in the event of a divorce, it eliminates the time-consuming and costly bickering over assets and money.

Ownership of a business (or the increase in the company’s fortunes since the marriage) is considered an asset acquired during the marriage (“marital property”) unless there’s evidence to the contrary. As a result, absent a prenup, state laws will require that marital property be divided equally, or at least “equitably.” Depending on your state, your entrepreneurial dreams could be cut in half should you divorce.

How Does a Prenup Protect My Business?
Contested divorces rarely bring out the best in people. Some will be ruthless, just to spite the soon-to-be ex-spouse. It’s not unheard of for a spouse to fraudulently claim that he or she has a stake in the other spouse’s business, which could be hard to disprove if you’ve not kept appropriate records. A prenup offers protection against predatory challenges in the following ways:

  • It can define your company as an asset acquired before marriage.
  • It can provide for who controls the company post-divorce.
  • It identifies who owns the stock in the company.
  • It can set out a fair method for valuing the business or its stock at the time of divorce (which could refer back to the formula contained in the company’s ownership agreement).
  • It can address all present and future property, assets and income, both during the marriage and in the event of divorce.

Like an ideal relationship, a successful prenup has the following qualities:

  • It’s fair.
  • There’s full disclosure of financial (and other) issues.
  • The parties entered into it freely (e.g., you’re not forcing your intended to sign while you’re on your way down the aisle).

It’s also vital that each partner gets his or her own attorney. Yes, it costs money, but think of it as an insurance policy. Isn’t your business worth it? The best that can happen is that you’ll live in married harmony and never need to rely on it. The worst is that you’ll be living in married hell and won’t have a prenup to protect you.

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