Can You Save Your Business From Your Divorce?
When a successful business meets an unsuccessful marriage, can you still salvage everything you’ve built?
For those who are facing divorce while at the same time celebrating a successful business, it might seem like you cannot salvage the business. The truth is, growing your professional outlet and growing a marriage can seem at odds with one another. Time is so limited and it can be hard to juggle both.
For business owners facing divorce, the threat of losing everything you have built as part of the divorce can be an all too real threat. In cases before, businesses have been lost to divorce agreements — either because of property laws or as the result of a sale in order to raise cash.
It’s an all-too-typical scenario: You get married young with no prenuptial agreement. At the time, you have a burgeoning career with funds of about $100,000. A few years later that online operation or brick and mortar store is worth $5 million, your spouse has a stake in the business, and now you’re having marital issues.
Strategies to Preserve What You’ve Built
If you’re a business owner who is having marital issues, there are a few strategies that can help preserve all the work you have put your sweat, blood, and tears into. You’ll want to take every precaution to do so.
Here are seven strategies to consider if your company is considered a joint asset.
- Maintain good and comprehensive records. Keep the family’s finances separate from those records.
- Pay yourself a good salary.If you have been in the practice of paying yourself less in an attempt to build the business, a court may see that as grounds to award more of the company’s assets to your spouse.
- Fire your spouse. If your spouse is an active member of the business, you will need to ease him or her out as soon as possible. The more prominent an ex’s role in the business, or the longer he or she worked in the business, the stronger the case for the spouse being entitled to a share of the profits.
- Sacrifice other assets.In a divorce settlement, the couple’s total assets are added up and then divided. You might want to sacrifice other assets, such as retirement accounts, the family home, or vehicles, in exchange for 100 percent of the business.
- Get a fair valuation. Use a neutral, court-appointed valuation professional to get a valuation of the business. Once you have that number, get a second opinion to review the figure before you agree to it.
- Arrange to make any payments over time. You can arrange to pay an ex for a share gradually. Monthly payments can come from the operation’s cash flow or a bank loan.
- Raise capital by selling a stake. You might be able to sell a minority stake in your business to employees through an employee stock ownership plan. Another option might be to find an angel investor or two who will pay cash in exchange for an ownership stake.
An important note: It’s rare for a business to be sold off to satisfy a divorce settlement because it would deprive the business owner of the future income needed to pay support payments.
Business Owner Divorce Lawyers Los Angeles
Filing for divorce can be a complicated process for anyone seeking to fairly divide their community property while safeguarding their financial well-being, but when ownership and complex property division comes into play, the stakes are significantly higher. Owners in Los Angeles have much to consider when filing for divorce, especially if they want to protect the integrity and financial security of what they previously owned or acquired before marriage, or ensure a shared venture is valued appropriately and divided fairly by the courts.
Affordable Los Angeles Divorce Attorney
Property division laws vary state by state, and in California, any property acquired by the couple in marriage is considered “community property” to be divided equally in divorce, which may not seem fair to you if you put more money or work into building it than your spouse did. If you are filing for divorce as a business owner in Los Angeles, or if you have been served divorce papers by your high net worth spouse, it is critical that you consult an experienced divorce attorney to evaluate your options. Our legal team at Divorce Lawyers Los Angeles specializes in family law and has extensive experience in business division and valuation in divorce. We can provide you with valuable legal guidance throughout the divorce process and help you determine what property and assets you are entitled to under California’s community property laws. Our attorneys will always try to help divorcing couples who own a business work out the issue of complex property division outside of court, using dispute resolution methods, but we are also prepared to aggressively represent our clients in court, should a trial become necessary.
California’s Community Property Laws for Owners
Under California’s community property division laws, in absence of an agreement saying otherwise, all assets (and debts) a couple acquires in marriage belong to both spouses equally and must therefore be divided 50–50 in divorce. Business ownership is treated as an asset in divorce, and there are a variety of ways to divide a Los Angeles business depending on whether it is considered marital or separate property, or both. If one spouse owned or inherited the business before marriage, it is likely the asset will be considered a mixture of marital and separate property, which is where things can get complicated. In cases where a business owner or high net worth individual enters into a marriage already owning significant separate property and assets, including one or more businesses, a prenuptial or postnuptial agreement may be drafted to protect the individual’s property in the event of a divorce or death, in which case the agreement will dictate how the property should be divided.
Before you find yourself in a spot where you might lose everything you’ve built, consider these preventative options.
- Sign a prenup.If the operation existed before you were married, you can designate it as a separate property owned by only you in your prenuptial agreement.
- Secure an early postnup.This is much like a prenup, except the agreement is signed after the wedding. You can designate your business as a separate property owned by only you. It’s ideal that you sign this postnup before the marriage disintegrates — ideally more than seven years before a breakup. Judges often view postnups skeptically.
- Place the business in a trust. This will keep this asset from being counted as a marital asset as you no longer personally own it. This will also protect the value of the company’s growth.
- Create a buy-sell agreement. This defines what happens to a business should any owner’s status change, as is the case in a divorce. The agreement might limit a spouse’s ability to acquire ownership, deprive a divorcing spouse of voting rights, or give you or other partners the right to buy at a low, preset price any interest awarded the ex.
- Have insurance. A whole-life insurance policy that builds cash value can be liquidated to provide the funds to buy out a spouse’s share, if need be.
Understanding How a Divorce Can Affect Ownership
In most divorces, the division of marital property involves splitting up assets like the family residence, vehicles, bank accounts, debts and retirement accounts. More complex divorce matters in Los Angeles, however, may include the division of other high-value property, including one or more businesses. There are various ways in which the issue of co-ownership can be handled when doctors, lawyers and other owners in Los Angeles decide to divorce:
- In one case, the couple may find that they can and still want to continue operating as partners, which means neither spouse has to relinquish his or her interest, nor will they have to go through the process of having the business appraised.
- If one spouse wants to continue owning and operating the operation and the other spouse wants out, the one spouse may choose to buy out the other spouse’s share, which means the business will need to be appraised.
- Both spouses could also decide that they want to sell outright when they divorce, in which case the entire operation will have to be appraised, and once sold, the couple will split the proceeds from the sale.
- Different issues are raised altogether for Los Angeles professionals who own or acquire a high-asset business operation prior to getting married, such as doctors and lawyers, and who see the business as separate property not subject to California’s community property laws.
Complex property division is typically a hotly-contested issue among divorcing couples in Los Angeles and complex divorces can take time to resolve, possibly dragging out over a period of months or even years. Full disclosure of the value of the business is imperative in dividing it equally, and valuation can be a complicated, time-consuming and costly process, especially if it comes down to one spouse being awarded the business and paying the other for his or her community share.
How an Experienced Divorce Lawyer Can Help
Divorce is rarely a pleasant process, but for the owners of one or more businesses, it can spell disaster. Some married couples who own a business together manage to be successful in both ventures, but in cases where the marriage deteriorates, and the ownership of the business becomes an asset to be divided in divorce, the divorce process can become extremely complicated and expensive, particularly if the case goes to trial. Selling or dividing what you’ve created is no easy undertaking, and the divorce process in Los Angeles can be extremely disruptive for business owners, especially when it comes to determining the value of the business and ensuring that it is split up fairly.
There are also situations in which one spouse may wish to challenge a prenuptial agreement in court. If, for instance, you signed away your right to ownership before getting married, but then during the marriage played an important role in the operation of the business, you may have grounds to challenge the agreement in court, in which case having a Los Angeles divorce attorney on your side can significantly improve your chances of achieving a favorable outcome.
Originally published at divorcelawyerslosangeles.com on December 3, 2018.