Property acquired before marriage is typically one party’s non-marital property. So, if someone starts a company before getting married, the business should be considered non-marital property. Simple. Right? Yes, in a textbook sense. In the real world, however, that is not always the case.
Divorcing spouses may seek repayment for contributions, whether for labor or money, that they made to the company during the marriage, viewing those contributions as marital property. Marital property is property acquired while married not otherwise excepted by statute. And it is here that situations tend to become complicated. Listen to why.
Regardless of whether a company starts off as non-marital property, if a spouse’s role in the business changes, or if the spouse’s compensation changes during his or her tenure there, that salary may be treated as marital property. For example, if the start-up distributes additional shares to the entrepreneur who founded it while he or she is married, those shares may be deemed marital property. New ventures may be considered similarly depending on how created they were formed and funded.
Though nobody planning a wedding wants to think about what will happen should the marriage not work out, incorporating a prenup into your wedding plans can help in the event it doesn’t. By definition, a prenuptial agreement is a document signed by you and your prospective spouse before marriage outlining how assets and income will be distributed, among other considerations, in the event of a divorce. No better reason to use one is where one or both of the spouses is in the process of starting or already owns their own business.
Because it is often difficult to “follow the money” where there is an independently owned and operated business, it may be necessary to enlist the additional help of a forensic accountant if you ultimately decide to separate from your spouse. Hiring a forensic accountant can be costly depending on the accuracy of business records and the level of access each spouse had during the marriage to the inner-workings of the company. Including how to allocate expenses for forensic accounting is just one of the many inclusions a couple can make in their prenup.
Without a prenup in place, in many states, a spouse may entitled a portion of the business’ appreciation in value. Keep in mind that what goes up also can come down. If there exists debt, both spouses may be responsible for paying it off, even if one spouse was not at all involved in the business’ management. And then there is the matter of protecting the intangible, namely control. If two people divorce, who will take responsibility afterward for running the company? In the same vein, what happens if you decide to divide the business between the two of you? What you choose may implicate other individuals in addition to yourselves, including any employees and clients you may have. If you are concerned about their disposition and well-being should you and your spouse part ways, now is the time to make provisions for the future and address any other concerns you may have.
A carefully drafted prenup can carve exceptions out of the marital estate to protect the business. Those exceptions can be as broad as making everyone financially independent or as narrow as excluding a particular business interest and any property or income acquired from it. In a nutshell, if you can think of it, you can include it your agreement.
One final thing to make a note of – make sure you and your spouse retain separate counsel when writing your prenup. Doing so will not only ensure that both of your interests are represented fairly, but will also serve to strengthen the integrity of your document later should any controversy arise.
Divorce can derail businesses, and a prenup can help to protect them, especially fragile start-ups. Not to mention your assets, income, and, most importantly, emotional state as you start up your new life post-divorce.