Divorcing with a Family Business

Flicker, Kerin, Kruger & Bissada LLP

Mixing business and marriage can have one of two outcomes: if you can keep your emotions out of your work, your spouse may be your best business partner. However, if your marriage starts to struggle, you might find that your family business does too.

Thankfully, that doesn’t have to mean your company will be negatively impacted if you decide to end your marriage. Although running a business while divorcing your co-founder is not easy, it is possible. Here is what you need to know about how your divorce may impact your company and vice versa, as well as suggestions for keeping things running smoothly when your marriage is ending.

Should you choose to divorce your company’s cofounder, you need to take precautions to ensure your business remains operational. This article discusses some unexpected risks your business may face during your divorce and three critical steps you should take to protect it.

How Divorce Impacts Family Businesses

As an entrepreneur, you are familiar with the legal and administrative work necessary to keep your business operational.

  • Loss of investor trust: A divorce between cofounders can impact the trust your shareholders and investors place in the business. Many investors believe that divorces put companies at risk of dissolution or hostile takeovers. You may find that your investors require more frequent and in-depth reports to reassure them that operations continue as usual.
  • Complicated asset division: Businesses are considered assets, like a house or car. If you founded a business with your spouse during marriage, California law provides that the business is community property unless you executed a Pre-Marital or Post-Marital Agreement that provides otherwise. Divorce can complicate your business’s ownership structure significantly if you choose to split ownership instead of buying out your partner’s share.
  • Loss of majority ownership: Should you split ownership of the business with your partner, you may potentially lose majority ownership. Suppose you, your spouse, and a third party collaborated on the businesses, and each of you claimed one-third of the business. After your divorce, your ex-spouse and the third partner will have majority ownership in the company, potentially allowing them to make significant decisions without your consent.

These issues can make running your business significantly more difficult during your divorce. You must be proactive in your approach to ending your marriage to ensure these problems do not cause you to lose control of the company or have a detrimental impact on your business.

Tips for Keeping Your Family Business Operating Despite a Divorce

Despite these struggles, you can work to keep your business on track during your divorce. With the proper preparation, you can limit the impact of your personal life on your company’s operations. Strategies you can use to minimize issues include:

Implement Trusts/Appointing a Third-Party Director

Placing a business in a trust can be a good solution to retain control of a business regardless of a divorce. Business trusts separate the business from your personal assets. If your business is not a corporation or an LLC, trusts provide privacy and simplify ownership and estate concerns in a divorce.

You can appoint a third party director to the company to assist in running the business and making decisions.

Review Extant Contracts

If you founded your business after getting married, California law states that your spouse likely has the legal right to half of it. The only exception occurs if you and your spouse have signed a legally binding contract stating otherwise. Contracts that may affect whether your business is considered joint marital property include:

  • Pre-Marital Agreements: You and your spouse may have addressed ownership of current and new businesses in a Pre-Marital Agreement. You can use these contracts to dictate whether your spouse has any ownership of a company you founded or how ownership of cofounded businesses should be split in a divorce.
  • Prost Marital Agreement: A Post Marital Agreement can cover all of the same topics as a Pre-Marital Agreement. The difference is that Post Marital Agreements are signed after a couple has already married.
  • Buy-sell agreements: These contracts are used by owners of partnerships, sole proprietorships, and closed corporations to determine how ownership will be transferred should a partner choose to leave the company. You can implement a buy-sell agreement with your spouse to cover how one of you will buy out the other person if you decide to divorce.

Consider a Buyout

If one spouse isn’t interested in keeping their share of the family business, the other spouse can choose to buyout their ownership interest.  A formal business appraisal will determine the value of the company.  The parties can then negotiate, trading shares of other marital assets to offset the appraised value of the family business.  This will allow one spouse to buy the other spouse out of their interest and retain ownership of the family business.

Consider Dividing the Company

If you do not have a Pre-Marital Agreement, Post-Marital Agreement, or buy-sell agreement in place, your spouse can claim half of the business in court. If this is the case, then you will need to decide how best to divide the company.

You can choose between two general strategies for the division:

  • Split ownership as active owners: In this situation, you split your ownership over the business, and you both retain decision-making abilities. These splits are typically 50/50. If you and your spouse can still work together, this may be the smoothest transition for your company. However, if you can’t put your relationship aside, your company could be at risk of arguments and poor leadership.
  • Name your spouse an absentee owner: The alternative is to name your spouse an absentee owner. This would give them the right to receive profits from the company but would not give them any responsibilities in the business. While absentee ownership reduces the amount you earn from the company, it also lets you retain complete control.

The right solution depends on your company and your relationship. An experienced divorce lawyer can help you find the best way to manage a split or retain your organization in one piece.

Work with the Experts to Protect Your Business from Divorce

As an entrepreneur, you understand the importance of working with reliable partners. Getting skilled, knowledgeable help when you decide to divorce is just as important.

You can reach out to the experts at Flicker, Kerin, Kruger & Bissada LLP to make navigating your divorce less complicated. Our team has decades of experience helping entrepreneurs and business owners manage divorces without putting their companies at risk.

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