For business owners, the biggest risk could come from divorce
Business owners are usually pretty good at identifying and mitigating risks. However, one risk that often finds business owners unprepared is divorce. The breakup of a marriage can present major complications for a business, especially if the spouses are also jointly involved in the running of the business. As CBS News reports, an estimated 3.7 million businesses have joint owners who are also married to one another. Even if only spouse owns and operates the business, however, the other spouse may still have a claim on a share of that business. Below is a look at how to mitigate some of the risks for business owners who get divorced.
Get a prenuptial agreement
California is a community property state, meaning that almost everything that belongs to one spouse is considered to be equally owned by the other spouse. In other words, if one spouse runs a successful business, then his or her spouse may be able to claim a substantial share of that business in the event that they divorce. Obviously, when that happens the very future of the business may be put in jeopardy.
One way to ensure such a situation doesn’t arise is by signing a prenuptial agreement early on. As MarketWatch reports, a prenuptial agreement, so long as it is legally enforceable, can negate the community property laws of states such as California. To be enforceable, however, the prenuptial agreement must be signed before witnesses and it cannot be “unconscionable” – in other words, one spouse cannot use a prenuptial agreement in order to leave the other spouse destitute.
Other options for business owners
While a prenuptial agreement is almost always a good idea, there are still ways to mitigate the risk of divorce even in cases where the spouses haven’t signed a prenuptial agreement. A buy-sell agreement, for example, could also explicitly spell out what happens to the business if one business partner is forced out, which may happen if he or she gets divorced.
If both spouses are also joint business owners, then a shareholder agreement could also help reduce some unpredictability involved with getting divorced. Such an agreement could stipulate whether the business is to be split up in the event of a divorce or if one spouse will buy out the other spouse.
Talking to a divorce attorney
The best way to understand what options and risks divorce presents to business owners is to talk to a family law attorney as soon as possible, especially an attorney who is experienced in handling business valuations during divorce. An attorney can help clients protect their best interests and help them negotiate an effective and fair divorce agreement.