A breakup can affect a person’s life in many ways, including emotional and financial aspects. Not only do spouses need to make this life-changing decision, but they also need to decide on child custody and support, alimony, property division, etc. If one of the spouses (or both) owns a business, the situation can become even more complicated.
Divorce and business is a rather sensitive topic. Running a company requires a lot of time, effort, and investments, especially if a person has built it from scratch. It becomes a kind of child, and hardly anyone wants to let it go down the drain.
Thus, it’s crucial to understand how the dissolution of marriage can influence your business and what steps you can take to protect it. You’ll find more on this in our article.
What to Consider During Divorce if You Own a Business
Business owners going through a divorce need to consider several factors that can affect their business.
First, they need to understand how their business can be classified. It is subject to division if it is part of marital property, which is all property purchased, inherited, or earned by spouses during the marriage. It stays with one spouse if it is considered separate property (property owned before the wedding or inherited). However, in some cases, separate assets may also be subject to full or partial division. For example, if the family budget was used to invest in the business.
Second, if the business should be divided, spouses need to understand their local laws and state specifics. There are 2 types of states in America:
- Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), where marital property is divided 50/50.
- Equitable property distribution states (all other states), where marital property is divided fairly (not necessarily 50/50), considering factors like marriage duration, each party’s income, separate property, etc.
Third, couples need to decide which way they want to proceed with their divorce. If spouses can’t break up peacefully, the case can become contested. It means that all questions, including what to do with the business (if considered marital property), will be solved by the court.
If you want to avoid lengthy litigation and don’t want the court to make decisions for you, you can start an uncontested divorce. In this case, you can discuss all issues with your spouse, including the future of your business, reach a consensus and sign a divorce settlement agreement.
The idea of dissolving a marriage amicably is quite popular. Some statistics show that around 95% of divorces are filed as uncontested. Bob Butterworth, CompleteCase Chief Executive Officer, explains why: “Choosing an uncontested divorce means that couples are ready to find a solution that meets each side’s needs and want to maintain a normal relationship even after a breakup.”
He adds: “Moreover, our internal research shows that 37% of couples who use CompleteCase to prepare documents for their uncontested divorces online are business owners. And this number is growing, indicating that more spouses understand that disputes can negatively affect their companies.”
Impact of Divorce on Your Business: 5 Possible Scenarios
Depending on which strategy couples choose, the impact of divorce on their business can vary. We will list 5 possible scenarios.
1. Disrupting daily operations
Dissolution of marriage involves a lot of work for the spouses. They need to decide which way they want to proceed (contested or uncontested divorce), review local Family Laws, select suitable forms and fill them out correctly. Some couples may need a mediator and/or a lawyer.
Preparation for divorce and the process itself requires a lot of time and attention. Thus, you may be less focused on your managing responsibilities, leading to negative consequences for your business. Moreover, your divorce can also distract your employees from their duties if they are involved in the process (documents preparation, appraiser’s visits, etc.)
2. Co-owning the business
Your spouse could become a co-owner of your business. Such a scenario can have both positive and negative effects. It depends on whether the spouses can work together effectively and for the benefit of their company. If so, your business will not be affected. If not, the consequences can be unpredictable.
Moreover, the situation can get more complicated if you are a co-owner of the business. In this case, your share can be split between you and your future ex. If your spouse becomes an uninvited new partner, it can affect your relationships with other co-owners.
3. Buying the business out
If you own the company together with your spouse, and, for example, the other party does not plan to run the company after the breakup, you can try to buy out their share and become the sole owner. But, of course, you should consider agreements with your spouse, business valuation, and other factors.
4. Selling the business
If you can’t agree to co-own a business or buy out your spouse’s share, you may have to sell the company and split the profit according to your agreements or a court decree.
It’s not an easy decision, especially for those who have built a company from scratch. However, if selling a business is inevitable, it is worth considering marketability, economic conditions, the value of the company, and its profitability.
5. Dissolving the business
Dissolution of marriage can shift the spouses’ focus, and their company can end up neglected or even dissolved if they don’t have the energy to manage it. Such a decision is the most radical.
Catherine Stanton, an attorney and divorce mediator from Denver, says: “The worst-case scenario is that you have to liquidate the business and split the proceeds.” She also adds: “When we’re going through a divorce, we’re not always our best selves. If you’ve got a bad relationship with your spouse, they might not feel compelled to find another solution and may go for the nuclear option.”
The combination of different adverse divorce effects like disrupted business processes, damaged reputation, etc., caused by a divorce, can also result in business liquidation.
How to Protect Your Business
By knowing all the possible scenarios, you can choose a strategy to fight the harmful effects of divorce on your business. Consider the following tips:
- Separate family and business finances so that there is less confusion over what belongs to whom;
- Document in detail any transactions related to your business, especially those in cash.
And, of course, you can sign a prenuptial agreement. It will help you clearly describe what happens to your business if the marriage ends.
Although it’s not romantic, lawyers often support such a solution for spouses owning businesses. For example, Joleena Louis, Divorce Attorney To Entrepreneurs, advises perceiving prenup as insurance. She says: “Most people go into marriage having no idea what could happen in the event of a divorce. Just like you get car insurance not planning for an accident but so you are prepared just in case, it makes sense to do the same thing for your marriage.”
Even though divorce can damage you and your business, you can at least mitigate its negative impact if you handle it wisely. Review your local Family laws, decide on how you want to resolve issues related to your business, negotiate with your spouse, and try to reach a consensus.
If you are about to get married and want to take care of your business in advance, consider signing a prenuptial agreement. Remember, the more things you can plan, the better for your business.