What Happens If Couple Divorce and Own Business?
High-profile cases like the Bezos or the Gates should cause many people to consider how their business and marital assets are tied together. You need to have plans in place from the beginning. No one thinks their partnership will end. However, it’s necessary to have a plan in place, just in case.
The Dallas Business Journal’s recent article entitled “Does your business need a prenup?” explains that there are three typical outcomes when married couples working as business partners decide to end their relationship:
- One individual buys out the other partner’s shares and continues running the business;
- The partners sell the business and divide the proceeds; or
- The couple continues working as partners after the divorce.
Safeguards can be put in place on the first day of the relationship to protect your personal and business assets in the event of a divorce. A way to do this is through a prenuptial agreement, which states what will happen if a split happens. A pre-nup should:
- Establish the value of the business as of the date of marriage or the date the agreement is signed;
- Detail a course of action with the appreciation or depreciation of the business from the date of the marriage;
- Say how business value will be measured; and
- Specify the allocation of business interests to be awarded to each spouse in the event of a divorce.
In addition to a prenuptial agreement, any privately held company should have a shareholder agreement (or “operating agreement” for non-corporations). The shareholder agreement is one of the most important documents owners of a closely held business will ever sign, but unfortunately, many businesses don’t have it. It can also help to protect assets against judgment creditors and predators.
It controls the transfer of ownership when certain events occur, like divorce and states the following:
- Which party will buy out the other’s shares of the company if a buyout occurs; or
- If either party has the right to sell, how the ownership interest will be valued and the terms and conditions concerning the acquisition.
Because there are some tax implications involved in a buyout, it’s best to bring in experienced estate planning attorney who understands federal income tax law (and possibly federal estate tax law) for this process. In addition, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies.
BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.
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Reference: Dallas Business Journal (Aug. 1, 2022) “Does your business need a prenup?”