In business, you wouldn’t dare think about taking on a project without a contract in place. A contract protects all parties involved and outlines actions to be taken if things go wrong (e.g. someone doesn’t pay on time or something prevents the project from moving forward).
When it comes to affairs of the heart, we tend to leave the business mindset at the door. Unfortunately, this puts a lot of small businesses in a bind when divorce happens. As unromantic as they may be, a pre-nuptial agreement can help protect your business in case the worst happens: you and your spouse decide to split.
Prenups Can Keep Ex-Spouses Out of the Business
A prenuptial agreement can determine which part of the business – if any – will be considered marital property. It will also determine what will be considered separate property.
In many cases, prenups contain a waiver of interest in the business as well as a stipulation that any shares transferred to the ex-spouse will need to be approved by business partners. If your business is co-owned with partners, then you might consider having them sign the prenup as well.
Prenups May Ignore Business Appreciation
Prenups should cover as many issues as possible in order to protect your business. In many states, a business created before marriage would be considered separate property, but the appreciation of the business’s value would likely be considered marital property.
In this case, the ex-spouse may be entitled to half (or more) of the appreciation value during the marriage.
A valid and enforceable prenuptial agreement can include a provision in which you and your partner agree that pre-marital property retains its character during the marriage. In this case, your ex-spouse would not be entitled to half of the appreciation value.
Prenups May Limit Your Liability in Your Spouse’s Future Debts
A well-drafted prenuptial agreement can also help limit your liability in your spouse’s future debts and keep you from inheriting debt in case of a divorce.
Creditors can go after marital property, which can include your business.
Prenups can include a provision in which you do not agree to assume your partner’s debts during the marriage in case of divorce.
A prenuptial agreement can help protect your small business if you decide to get divorced, but such agreements can be unenforceable if certain formalities are not followed.
For starters, the agreement needs to be in writing, and both parties should provide a full disclosure of all assets before the marriage. This disclosure should be attached to the prenup.
Additionally, both you and your future spouse should have separate attorneys when drafting and reviewing the agreement. One attorney can draft the agreement, but the other party should have separate legal counsel review the agreement, explain the terms of the agreement and negotiate (if necessary) on behalf of the other party.
In order for the agreement to stand up in a court of law, it needs to have fair terms and the language needs to be clear.