Protecting Your Business During Divorce
High net worth divorce cases involve assets of significant value, which can include business ownerships or partnerships. Your company is likely your most valuable asset, as you have invested large sums of money and spent years cultivating its success. It is important to protect your business interests in the event of divorce, since the value of your company could be subject to equitable distribution.
Secure Your Company with a Prenuptial Agreement
The attorneys at Brian D. Perskin & Associates, P.C. are big advocates of pre- and postnuptial agreements. These agreements help to define which assets are considered marital or premarital property, and how such assets will be divided during divorce.
Business owners and entrepreneurs should always execute a prenuptial agreement prior to marriage to help protect their business interests. Under New York state law, any company holdings, partnerships, or other business interests are subject to equitable distribution. This means that one spouse may be entitled to a portion of their ex’s business and its monetary value. Pre and postnuptial agreements allow couples to stipulate as to the property designation of a company, as well as the amount or percentage each spouse is entitled to in the event of a divorce.
Once comingled, business ownerships or partnerships can be divided between spouses during the equitable distribution phase of divorce. This means that a spouse who does not hold an interest in their partner’s business venture could receive part of its value in their divorce settlement. The non-owning party must prove that they played a pivotal role in the company’s growth, either by a direct contribution, or an indirect contribution.
Direct and Indirect Contributions
A direct contribution means that the non-owning spouse worked for the company. This includes being a salaried employee, as well as volunteering to handle administrative or organizational tasks without being considered an employee. Creating promotional materials or assisting with business plans can also count as direct contributions.
An indirect contribution is when a spouse does not complete work directly related to the company, but has helped to foster the business’s growth by supporting their husband or wife. This means that the non-owning spouse provided financial or emotional support during the development of the business. A non-owning spouse would be entitled to a share of the company’s worth if they paid for their partner’s tuition or otherwise assisted in helping their spouse receive professional licenses. Furthering one’s education and expanding a skill set can lead to enhanced earning capabilities, which may result in a larger alimony award. Additionally, a spouse who quits their own job to stay home and raise a family to allow their husband or wife to dedicate more time to a business venture made an indirect contribution to the company’s success.
A spouse may be awarded a share of their husband or wife’s company in a variety of ways. This includes stock options, a lump sum, or a court order requiring the business owner to pay their ex a certain percentage of earnings each year for a set amount of time. If a business is the marriage’s main asset, then it is common for a court to order a sale of the company, with proceeds being divided between the parties. Direct contributors will often receive a larger percentage or award than indirect contributors.
Trusts and Buy-Sell Agreements
Signing a pre- or postnuptial agreement isn’t the only way to protect your company during divorce. Business owners have different options for protection, which vary depending on the kind of business they operate.
One way business owners can protect their company is by placing it in a financial trust. Once placed in a trust, the business is no longer considered to be separate or marital property. The business assets will be managed by a trustee, and not either spouse. The spouse and other business partners will be considered beneficiaries. Because the spouse will not have access to the assets, or necessarily benefit from them, then the assets will usually not be subject to equitable distribution.
A buy-sell agreement is designed for businesses with more than one owner. A buy-sell agreement can protect all of the owner’s interests in the event of the death of a co-owner, as well as divorce. This type of agreement stipulates what is to be done with a specific co-owner’s share of the company if they are being forced to transfer their holdings, and under what circumstances said holdings will be transferred. For instance, it is possible to stipulate that a wife will receive a portion of her husband’s holdings if his infidelity has led to divorce (much like a lifestyle clause).
Given the sensitive nature of small business ownership and divorce, it is imperative that owners take preventative steps to protect their companies prior to a matrimonial action. Trusts, buy-sell agreements, and other forms of protection should be addressed as soon as possible, and should only be handled by qualified attorneys.
Spouses who are Business Partners
In some cases, a married couple will co-own a business together. Two of the most common methods by which couples can address a shared business during divorce are (1) a buy-out, or (2) continuing on as business partners.
For couples that are able to put their personal differences aside, they may decide to remain business partners. This method will typically work best in uncontested divorce actions where spouses are able to communicate effectively. Couples who choose this path are making a commitment to the success of their business, and not to allow their marital troubles to interfere with the company. While intentions may be good in the beginning stages, it is best for couples in this type of situation to draft a new buy-sell agreement to protect future holdings should the relationship sour.
A complete buy-out is the best option for married business partners who are unable or unwilling to continue to run their company jointly post-divorce. One party may offer to buy the other spouse’s share or interest in a company as opposed to continuing to operate the business together. A complete buy-out can be completed via an array of different purchasing methods, including using separate or pre-marital funds, as well as marital assets such as property, investment, and retirement accounts, or joint cash funds to buy-out the other spouse. For example, a husband can agree to give his wife sole use and occupancy of the marital residence and a lump sum of cash in return for her surrendering her ownership interest in the business.
Business Appraisals and Valuations
Before a company can be divided up, it must be appraised. A business appraisal will determine the company’s value, just like a property appraisal determines a home’s worth. Appraisals will be completed during the divorce, and a judge will usually order an independent appraisal firm to complete the valuation. During the valuation, appraisers will review detailed financial records, so it is best to start compiling all business documents during the early stages of divorce.
Trusted Representation in New York Divorce
Brian Perskin recognizes the importance of protecting your small business during divorce. Brian has spent the last 25 years building his one-person firm into a divorce and family law powerhouse with a team of attorneys. He is well aware of the plights and sacrifices New York City business owners make to guarantee the success of their ventures, and his team is dedicated to providing the best representation for entrepreneurs. For more information, contact the highly accredited Brian D. Perskin & Associates, P.C. for a free consultation today.