Protecting A Business During A California Divorce
Prenuptial and postnuptial agreements can help you protect your business and other assets in the event of a divorce.
The divorce of Kim Kardashian and Kris Humphries made headlines at the end of 2011. Many question whether the divorce after just 72 days hurt the Kardashian brand. However, in the reality television business, the drama from Kim's divorce may not necessarily be bad for a family business that benefits from publicity.
Unfortunately more than 50 percent of first marriages fail and the failure rates for second marriages are even higher. Maybe in appreciation of this statistic, Kardashian insisted on a prenuptial agreement to protect her assets. For those who own a business, divorce can be a pivotal financial moment.
Divorce for a business owner is usually more difficult because of the complex issues of business valuation and spousal support that could potentially threaten the continuation of the business. However, the effects of a divorce for a business owner can be lessened by planning ahead.
California is a community property state. Both spouses are considered equal owners of marital property. This means that the court must divide community property equally between the spouses. Marital property related to a business may include:
- Closely held businesses and profits
- Professional practices
- Business real estate and
- Limited partnerships
In California, a spouse may be entitled to 50 percent of the business when the court equally divides the marital property. Even though California is a community property state, the parties may agree to divide their property in any fashion and need not divide it equally.
Prenuptial Agreements Offer Business Protection
Prior to marriage, all business owners need to consider protecting their business in the unfortunate event that the marriage does not last forever. And while it might not be terribly romantic, one way to do this is through a California prenuptial agreement. In a prenuptial (premarital) agreement, prospective spouses (domestic partners) can outline their present and future property rights.
A prenuptial agreement can reduce the conflicts later in the event of a divorce, but the agreement may also preserve a marriage by laying out conditions that foster the marriage. The prenuptial agreement can also protect separate property that each prospective spouse brings to the marriage (e.g., a closely held family business) and change the effects of community property laws by deciding how to classify property that is obtained during the marriage.
Agreements routinely list what each person brings to a marriage. This will include what each party owns (all their assets) and what each owes (liabilities). The agreement will explain what happens to the party's assets and liabilities upon separation, divorce or death. Property and debts acquired during the marriage may also be included in the agreement as well as what will happen to it at separation, divorce or death.
Requirements Of A Prenuptial Agreement
The prenuptial agreement is viewed as a contract and in order to be upheld by the court, the agreement must meet several requirements:
- The agreement must be in writing and signed by both of the prospective spouses (agreements involving real property should be acknowledge and recorded).
- The parties must have the capacity to consent. For examples, agreements should not be sprung at the rehearsal dinner while one of the parties is intoxicated. Courts may also set aside an agreement signed within a short time frame of the wedding, because it could appear the agreement was signed under pressure.
- The agreement must be lawful or, said another way, the agreement must generally be fair. Courts will not uphold agreements that are lopsided and favor only one spouse.
- Each prospective spouse should also have a California family law attorney review the agreement to make sure that the agreement correctly states his or her wishes.
Well drafted prenuptial agreements can be the best way to protect a business that is brought to the marriage or that may grow during a marriage. The courts generally respect such agreements.
If you are already married, a postnuptial agreement may be used to address what will occur on separation, divorce or death.
Postnuptial Agreements Can Protect Business Interests Once Married
A postnuptial agreement is similar to a prenuptial, but it is lays out marital rights and obligations between husband and wife after the marriage. These agreements are generally less favored by the courts and will be closely scrutinized by the court. However, these agreements can be used to successfully change the character of property from community property to separate property or vice versa (also called "transmutation").
In addition to prenuptial and postnuptial agreements, business owners should pay themselves competitive salaries rather than investing all earning back into the business. Investing all business profits back into the company will result in your spouse having a larger claim in the company. Also, consider how involved you want your spouse to be in running the business and whether you would be able to continue to work together after a divorce.
If your spouse has an ownership interest in the business and you do not want to continue as business partners following a divorce several solutions are available. Other marital assets may be used to purchase your spouse's share of the company or a long-term payout can be negotiated. In the worst case scenario, the business might need to be sold and the profit divided.
If you are a business owner, you need to consider how marriage will affect your ownership rights. An experienced family law attorney can explain options to protect your business interests.
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