Legal Master Class: Four Ways To Protect a Business Before or During Divorce

If you own a business and you’re in the midst of a divorce, you need to take several action steps to protect yourself. Or, if you’re about to get married and own a business, you need to make some upfront moves to keep your business out of harm’s way.

That’s where Jacqueline Newman, managing partner at the matrimonial law firm Berkman Bottger Newman & Schein LLP in Manhattan, can help.

Newman, also the author of the book The New Rules of Divorce: 12 Secrets to Protecting Your Wealth, Health, and Happiness, says time is of the essence when trying to protect a business before or during a divorce.

“Many of our clients ask how to “divorce-proof” their business,” Newman says. “With the amount of blood, sweat, and tears business owners put into developing a company, their concern – as well as the concern of any shareholders they may have – is understandable. Business owners can take a number of steps to keep their business safe during any upheaval in their lives, both before and after getting married.”

According to Newman, the most effective time to take steps to protect your company from divorce-related issues is before you marry, or as early as possible in your marriage.

“Planning ahead is the best way to ensure security for a business,” she says. “In fact, business owners are a group that likely benefit the most from having a prenuptial agreement.”

Newman advises taking these business protection strategies as part of your wedding planning:

· Sign a prenuptial agreement designating your business as separate property as well as any appreciation or increased value of your business.

· If you don’t sign a prenup, consider signing a postnuptial agreement soon after marriage.

· With an LLC, corporation, or partnership, you can create a buy-sale, operating, partnership, or shareholder agreement with a provision in place stating what happens to the business in the event any owner divorces. Note, though, that while this may provide some security to partners in a business, it has no effect on the division of a divorcing partner’s interest.

· Ensure finances from the business are kept separate from marital finances.

“One key thing to understand is that even if a non-titled spouse is not involved in a business at all, a court is still likely to determine that the non-titled spouse should receive some portion of the value of that business,” Newman says. “This is because courts look at marriage as a financial partnership. If one spouse is staying home, raising kids, and providing support to the spouse who owns and operates a business, this is sufficient for courts to find that the spouse who stayed home should share, to an extent, in the business’s success.”

Protect your business during your divorce

If you went into your marriage without any protections set in place regarding your business, you still have choices, strategies, and options, even in the divorce process. “For example, your spouse may attempt to inflate his or her contributions to a business, or obtain an appraisal that overvalues the business, in the hopes of securing a larger buyout,” Newman adds. “Good divorce lawyers can counter this.”

“Additionally, skilled representation, strong negotiation, and deft financial planning can help avoid either excessive payouts to spouses or restructuring of a business. An experienced family law attorney can help you determine the best decisions for your particular situation.”