Your business may be your most valuable asset. Before you divorce, you should take steps to protect it or you may see much of your investment and efforts go to your former spouse.
Planning should begin well before you start the divorce process. Otherwise your efforts may be delayed or stopped in court.
Colorado is a marital property state where any property that was owned before marriage, certain inheritances and gifts and some personal injury judgments stay with the spouse in a divorce. But separate property may be divided if is mixed with marital property that was obtained during marriage such as pensions, real estate, insurance, closely held businesses, and professional practices.
Colorado is also an equitable distribution state where courts consider several factors when dividing marital property. Courts consider fairness issues such as the marriage’s length, the spouse’s earning power and their involvement with developing the business. Property division may not be exactly equal.
Prenuptial and postnuptial agreements
These agreements can help protect business interests. A prenuptial agreement is a written contract executed well before the spouses marry. It sets forth their property rights in a divorce along with other issues such as spousal support. A prenuptial agreement may govern how the business will be divided and valued, among other things. These agreements can override laws on property division.
Couples may also enter a written postnuptial agreement after marriage if they never agreed to a prenup. These may not as strong as prenup but can provide some protection.
Both agreements require complete transparency of each party’s finances. These contracts must be entered voluntarily and without duress, cannot be unconscionable and need to meet execution requirements.
Postnuptial agreement undergo more scrutiny because they are entered after marriage which requires spouses to act in the best interests of each other. Engaged couples entering a prenuptial agreement do not have this duty.
Partnership, shareholder, LLC, and buy/sell agreements
Partnership, shareholder, or operating agreements should include terms for protecting the interests of other owners if they ever divorce. One provision may contain a requirement that unmarried shareholders give the company their prenuptial agreement before marriage accompanied by a waiver from the owner’s soon-to-be spouse of their future interest in the business.
Another term should prohibit the transfer of shares without the other partners or shareholders’ approval. Partners and shareholders would also have the right, which they do not have to exercise, to purchase the shares or interests of the divorcing spouses so that they can keep control of the business.
Keep your salary competitive
You risk your business interest if you receive a salary that is not competitive and reinvest the savings into the business. Your spouse may claim entitlement to more money or a larger share of your business because your salary was reinvested into the business and did not benefit the household.
Your spouse’s involvement
Your spouse’s involvement, contribution or participation in the business may increase the share they receive in a divorce. Their share may increase with their amount of involvement. If there are business partners, your spouse will own a percentage of your share.
Paying off your spouse
If your efforts are unsuccessful, you can still protect your business interests and keep your spouse out of the business with substitute assets. You can pay off the other spouse with your share of marital assets such as cash, stocks, real estate, and retirement funds.
A property settlement note is another option. This is a long-term payout with interest on the amount you owe for the value of your other spouse’s share of the business.
You may also sell the business and divide its sale proceeds. This is an option of last resort but may be necessary if the business constitutes the vast majority of assets and there is no other way to pay off your spouse.
An attorney can provide options and prepare documents to help protect your business. Lawyers may also help protect your rights in divorce proceedings.