When two people say “I do,” they don’t expect to split up months or years later. But about half of all marriages end in divorce in the United States. If you run a business, you need to prepare for the possibility of divorce before you even walk down the aisle.
Here are five ways to protect your business from divorce:
1. Form an LLC, Trust or Corporation
Forming an LLC or corporation can help protect your business assets in case of divorce, especially if you incorporate before you get married.
Even if you’re the sole owner of the business, you can still form an LLC or corporation.
By incorporating, forming an LLC or creating a trust, you create a separate entity that can hold ownership of business assets, such as a company car. But it’s important to ensure that you don’t use marital assets to pay for company expenses. If you do, the court could determine that the company is actually marital property.
2. Sign a Prenuptial Agreement
A prenuptial agreement may not be the most romantic way to start a marriage, but it can shield your business if you do decide to divorce in the future.
A well-drafted agreement can include an interest waiver and outline what part of the business – if any – will be considered marital property and what part will be considered separate property. It can also include a provision in which you state that the business will retain its character throughout the marriage. This means that your spouse would not be entitled to half of the business’s appreciation if you do get divorced.
A prenuptial agreement should be in writing and include a full disclosure of all assets before marriage.
3. Keep Your Spouse Out of the Business
Even with protections in place, there’s a good chance that the business will be considered marital property. If your spouse is employed by your business or helps run the company in any way, he or she may be entitled to a significant percentage of the business if you get divorced in the future.
The more involved your spouse is in running the business, the greater the percentage will be. If you have business partners, your spouse will be entitled to a percentage of your share.
If possible, try to keep your spouse out of the business as much as possible.
4. Pay Yourself a Competitive Salary
Many business owners make the mistake of reinvesting everything back into the business and fail to pay themselves a competitive salary.
But if your marriage ends in divorce, your spouse may argue that he or she did not derive any benefit because all of the money went into the business instead of the household. This could mean that your former spouse would be entitled to a larger percentage of the business.
5. ‘Pay Off’ Your Spouse
If you are unable to protect your business and your spouse is now entitled to an interest in the company, you could potentially pay off your spouse.