A business partnership agreement covers a great deal of things, but divorce is not usually one of them. Unless your partner is your spouse, divorce is probably the last thing on your mind when forming your partnership.
But what happens if one of you does get divorced? What will happen to the business?
Exes May be Entitled to a Share in the Business
If your partner is getting a divorce, his or her spouse may be entitled to half of the partner’s stake in the business.
“Property division requires the court to first determine which assets and debts make up the marital estate and which are non-marital assets and debts,” says the Law Offices of Scott D. Rogoff, P.C..
If the business was launched after the wedding, the court could consider the business a marital asset – especially if the spouse had any participation in the running of the company. If this is the case, you may wind up with an unwelcome partner who now has a say in how the business is run.
Even if the business was formed before the wedding, the court will likely rule that the spouse is entitled to half of the business’s appreciation in value.
There are ways to prevent this from happening, but they must be taken ahead of time – either before the wedding or well before the divorce.
Prenuptial Agreements and Buy-Sell Agreements Can Save the Business
A prenuptial agreement and a buy-share agreement can help protect your business in the event of divorce.
A prenuptial agreement, while controversial, can declare that appreciation of pre-marital assets will be your partner’s in the event of divorce. It can also help protect your partner’s stake in the business and prevent the spouse from getting a share.
The only issue is that a prenuptial agreement must be signed before the marriage. A post-nuptial agreement may not stand up in court.
While effective, prenuptial agreements aren’t ironclad. That’s where a buy-sell agreement can come into play.
The buy-sell provision of a founder’s or partnership agreement will give partners the option of buying the divorcing spouse’s share. The provision should include a list of terms and conditions.
Ideally, non-partner spouses should agree in writing to all terms of the agreement long before the divorce arises. This can help prevent issues in court that may complicate the enforcement of the buy-sell agreement.
The Business May Still Suffer
Even if a prenuptial agreement and buy-sell agreement is in place, the business may still suffer. The divorcing partner may be pre-occupied by the proceedings, and this can affect the business’s performance.
It can be hard to mitigate this outcome, but it may be wise to have a plan in place in case this should happen.
Divorce will undoubtedly complicate a partnership – or any business – but taking steps to prepare for such situations can help prevent them from occurring or escalating. The goal is to minimize the impact and ensure that business operations will carry on as normal – or as close as possible to normal.