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How do I keep the business afloat during divorce?

On Behalf of | Sep 15, 2021 | Divorce

The family business is most often the most valuable asset in a household. So, when it comes to divorce, a New York business owner is likely to be apprehensive about how things are going to turn out. The fact is, nearly half of all marriages in this country fail at some point, and many owners do not take steps early on to protect the business if a relationship turns sour.

There are many factors that go into decisions about property division during a divorce procedure, including state laws, the particular structure of the business entity and when the business began, as well as whether the other spouse has been involved in helping to run it or supporting it financially. For residents of Suffolk County and surrounding areas, it is important to find out more about how complex property division issues may affect your business in order to ensure its future viability once the divorce is final.

What laws affect property division?

One part of divorce that can be quite contentious is the division of marital property, which is everything that either spouse has acquired during the marriage, including income, property, bank accounts, stocks and bonds, IRAs. New York is an equitable division state, meaning that the court will decide on a fair, but not necessarily equal, division of marital property.

For the business owner, this could mean that all that they have earned from the business during the marriage, such as profits, stock options, bonuses, commissions or even tax refunds related to the business, may end up on the table for distribution. If the business is a sole proprietorship, the court will most likely divide it equally, but if it is a corporation, the business owner’s shares may be subject to division.

There are other ways that a divorce can destabilize a business. If the court awards the other spouse significant stock in the business, this ex will be a shareholder or possibly a partner. If they then decide to leave and abruptly sell their shares, this will destabilize the business.

What steps can I take to protect the business?

There are options for avoiding future financial entanglements, and one of the most common is to keep the business separate from the marriage from the start. Many business owners sign a prenuptial agreement with their fiancé that will establish the value of the business at the beginning of marriage so that only certain future earnings or increased value may become part of marital assets.

Such a document can assign a role to the spouse or a percentage of the value of the interest in the company, so that the company or the owner’s share are not subject to division. Even if this document is not in place at the beginning of the marriage, many married couples sign a post-nuptial agreement, which offers similar protection to the business.

Shareholder, partnership and LLCs buy/sell agreements often include provisions that require married shareholders to have a prenup that prevents a future spouse from holding a future interest in the business, or that allows the other shareholders to purchase the business interest of the divorcing spouse.