Eric S. Neumann, APLC
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Insulating business from a divorce

A spouse may be required to give up assets in a divorce. There are precautions, however, that can help prevent a business from becoming a difficult matter during property division.

A prenuptial or matrimonial agreement, or a postnuptial agreement made after marriage, can help set out a potential resolution. The agreement can spell out how the business will be valued or how its assets will be divided. The spouses can agree that the business is separate property that will not be divided. This can help save the potentially expensive and time-consuming valuation involving the examination of the books, location inspection and employee interviews.

The agreement can also specify that any value to the business after marriage is marital property. Spouses can agree to limit the non-titled spouse's share to a share that is lower than what they receive for other assets. If the business is an equal partnership, the spouses can agree on which spouse will buy out the other's interests. The spouses may also decide to continue to work together despite their divorce.

Even without an agreement, spouses can take other precautions. One spouse can become the sole owner and make sure that organizing documents indicate that the business cannot be transferred if there is a divorce and that a cash award may be made to the other spouse. Records should clearly indicate the source of business capital and whether premarital or martial assets were used. Likewise, business and personal expenses should remain separate because separating commingled funds may be examined and complicate a settlement. All cash transactions must be well-documented.

Paying yourself a salary that is inconsistent with market rates can have consequences. For example, a spouse who is paid only $100,000 for a position that normally receives $200,000 may still be held liable for the unpaid balance when the court determines support.

Any spouse who works at the business should receive market scale for their work. If they do not receive this rate, the spouse may argue for a more equitable distribution and for a higher portion of the value of the business because of their contribution to its value.

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