Over the last few years, getting a prenup has become a more common practice, with couples increasingly identifying the importance of having a legally binding contract. Couples want to outline how their assets will be divided and who will own what if they get a divorce.
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Using a Prenup to Protect Your Business
Say you started the business before you met your would-be spouse. Do you want that business to be distributed by the court, or do you want a prenup stating who will control the company in the event of a divorce? Here are seven reasons you should get a prenup to protect your business.
1. It Evaluates Your Business When You Get Married
Suppose you want to avoid your business being divided after a divorce. In that case, you need to keep the premarital value of the business protected by stating its actual value in the prenup. This will establish your business as separate property at the time of the marriage so that it cannot be distributed should you get divorced.
Reputed firms such as Atlanta High Net Worth Prenup Attorneys offer services you can rely on to evaluate your business worth properly while setting up a prenup. Remember, though, that this will only apply to the actual valuation of the business stated in the prenup at the start of your marriage. Whatever additional value is added to the company during the marriage will still be subject to division.
2. What Will Happen If Your Business Gains Or Loses Value
Consider the profits and losses your business makes during the marriage—will your partner be sharing in them equally? You can clearly outline these clauses in the prenup, also stating how you can determine what share, if any, your partner will have in sharing the appreciation or depreciation of your business.
You can weigh these determinations by considering what contributions the spouse has made to the company during the marriage, as well as whether they have invested any capital into the business for its growth. Have they contributed time and effort? Have they come forth with ideas to enhance productivity, or have their efforts increased sales?
You need to set a fair compensation in the prenup if your spouse is contributing to the business. If your spouse was drawing a salary from the business, you can state this in the prenup as it affects their entitlement to a greater share of the profits. This is important as during a divorce a spouse may claim that they were not being fairly compensated despite contributing to your business in a large capacity.
3. It Establishes How to Evaluate the Business at the Time of Divorce
Suppose you don’t specify how to evaluate your business at the time of divorce. In that case, you may face inconvenience and added expenses caused by the valuation process carried out by an intrusive third party. These valuation processes can be very disruptive and taxing for your business as third-party officials will come to your business premises demanding financial records, procedures, and practices.
This process can hamper the overall productivity of your business. To avoid this disruption to your business, you need to agree and clearly state how you will evaluate the worth of your business at the time of the divorce. You should also outline the process taken into account to determine the value so that there are no disagreements later on.
4. It Specifies How Much of the Business Your Spouse Will Be Entitled To
You need to assign and specify in the prenup exactly what percentage of the total value of the business your spouse will be entitled to. This way, you will be able to prevent your business from being subject to the same guidelines that are followed to distribute the other marital assets. Suppose you both agree that your spouse will receive, say, 30 percent of the value of your interest in the business. In that case, this is the exact amount they will receive, even though the other marital assets might get divided 50/50 upon divorce.
5. It Provides Details of How to Handle Your Income
You may decide not to take a salary that is market appropriate for your contribution to the business. Instead, you may be opting to keep those funds in the business by reinvesting them. This way, you are limiting the scope to create the marital property or increasing its value that would be eligible to share with your spouse when you get divorced. You can state these conditions clearly in a prenup and give directions as to how assets would be distributed fairly in the event of a divorce.
6. It Helps to Keep the Business in the Family
You can keep your family business in the family, protecting it by blocking an ex-family member from having a say or an interest in the business that the family started. You can do this by stating this clearly in the prenup. But do keep in mind, that there needs to be a clause in the prenup stating that the spouse will be entitled to a share of the business if they work in it or have significant contributions to its growth.
7. It Avoids Forced Liquidation
While getting a divorce, if you cannot afford enough funds to buy out your spouse, you may be forced to liquidate the business to gather those funds. This usually happens if you cannot manage any other means to pay your soon-to-be ex-spouse for the share they are entitled to in the business. You may need to sell the business and pay off your spouse with the proceeds.
You can avoid this by recording your business as separate property in the prenup so it will be exempt from any liquidation attempts. You can also specify in the prenup what percentage your spouse will get in the event of a divorce or what methods will be used to provide them with this money (such as giving other assets to the spouse to compensate).
Follow the Plan
This article has stated seven reasons why you should get a prenup to protect your business, making it easy for entrepreneurs to create a plan with their would-be spouse.
This plan will dictate what will happen to the company and how much control will be shared between you.
Hopefully, you have deciphered the need to sign a prenup to protect your business in the event of a divorce. There are many ways a divorce impacts the business. We hope that it never comes to that!
