I founded a startup(solely owned) after my marriage and am in process of cofounding another one with a friend of mine. I am in middle of a possible separation or divorce with my spouse. It definitely drains you and impacts abilities to focus on startup. Is it possible to avoid my spouse claim any share on the startup? Can it impact the new startup I am planning to co-found soon?
Depending on your individual circumstances, your spouse may be entitled to as much as 50 percent of your business in a divorce. Since it is probably safe to assume that you will not want your ex-spouse to remain in your life as a business partner, what can you do to protect your business?
Although there are differences from state to state, in general, separate property includes:
a. Property that was owned prior to the marriage
b. An inheritance received by one spouse solely
c. A gift received by one spouse solely from a third party (not from the other spouse)
d. The pain and suffering portion of a personal injury judgment
Separate property can lose its that status if it is mixed or commingled with marital property or vice versa. For example, if you re-title your separately owned condo by adding your spouse as a co-owner or if you deposit the inheritance from your parents into a joint bank account with your spouse, then that property will most likely now be considered marital property. All other property that is acquired during the marriage is considered marital property regardless of which spouse owns the property or how it is titled. Marital property consists of all income and assets acquired by either spouse during the marriage including, but not limited to: Pension plans; 401(k)s, IRAs and other retirement plans; deferred compensation; stock options; restricted stocks and other equity; bonuses; commissions; country club memberships; annuities; life insurance (especially those with cash values); brokerage accounts – mutual funds, stocks, bonds, etc; bank accounts – checking, savings, CDs, etc; closely-held businesses; professional practices and licenses; real estate; limited partnerships; cars, boats, etc; art, antiques; tax refunds.
In many jurisdictions, if your separately owned property increases in value during the marriage, that increase is also considered marital property. It is also especially important for you to know if you reside in a Community Property State or an Equitable Division State. There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These states consider both spouses as equal owners of all marital property (a 50-50 split is the rule). The remaining 41 states are Equitable-Distribution States, which consider factors such as the length of marriage and the spouse's earning power and involvement in building the business when determining a settlement. Settlements in Equitable Distribution States do not need to be equal, but they should be fair (equitable). You should fully understand this especially important distinction between separate and marital property so that you do not inadvertently do anything that might cause your separate property to be construed as marital property.
So, what is a prenuptial agreement? A prenuptial agreement (prenup) is a contract signed by both parties before their wedding that details what their property rights and expectations (including alimony) would be upon divorce. A well-drafted prenup can 'override' both Community Property and Equitable Distribution State laws and the courts will usually respect such agreements, making them an immensely powerful tool in protecting your business.
Having said that, prenups can be rather tricky, so it is important that they are well drafted. To strengthen them, each to-be spouse should be represented by their own attorney. In most jurisdictions prenups should contain the following vital elements:
1) The agreement must be in writing (No oral prenups)
2) It must be executed voluntarily and without coercion (having your fiancé sign a prenup the day before the wedding is a good way to invalidate that prenup)
3) There must be full disclosure (no hiding of assets) - this is another way to invalidate a prenup
4) The agreement cannot be unconscionable (this is also another way to invalidate a prenup). For example, if you are making millions, do not expect to get away with only giving up the silverware in the divorce, even if that's what's in the prenup.
5) It must be executed by both parties, preferably in front of witnesses (or a notary)
Some attorneys even recommend having a judge witness the signing to make sure that no party was coerced. By using a prenuptial agreement, the parties can decide in advanced what property will be considered separate property and what property will be considered marital property and how that marital property should be divided. A prenup is probably one of the best and least expensive ways of protecting your business against a future divorce. But if you do not get a prenup put in place, a postnuptial agreement may be an option. It is like a prenuptial agreement except that it is, as the name implies, entered, and signed after marriage. To be valid, a postnups should contain the same vital elements as a prenup. Having said that, several states still do not recognize postnups and even when they do, postnups are challenged and invalidated much more frequently than prenups.
Before marriage, the parties are entering into an agreement much like two businesspeople entering a contract and neither party has any legal family law rights on the other. Theoretically, if they do not like the contract, either party can walk away. However, after marriage, the situation is quite different. The married couple now have very well-defined legal rights regarding support and property division, and they are in a fiduciary relationship with each other, meaning each party has to act in the best interests of the other party. Therefore, any transactions between them will be viewed with caution by the courts. By negotiating a postnuptial agreement, one party will typically be giving up some of these rights and that's why postnups will usually be held to a higher standard of fairness than prenups (on the theory that individuals have less bargaining power once married). Nevertheless, if you do not have a prenup, try to get a postnup. It is better than nothing. Just understand that a postnup is not nearly as ironclad as a prenup and you never know how the courts will act if one spouse decides not to abide by the terms of the postnup.
Partnership, shareholder and/or operating agreements should include various provisions that would protect the interests of the other owners if one of the owners gets divorced, including:
a. A requirement that unmarried shareholders provide the company with a prenup agreement prior to marriage along with a waiver by the owner's spouse-to-be of his or her future interest in the business.
b. A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business.
This point is often overlooked. If you don't pay yourself a competitive salary and instead reinvest everything back into the business, your soon to be ex-spouse might claim that he or she is entitled to more money or a larger percentage of your business because he or she did not derive any benefit and all your money went back into the business instead of the household. If your spouse was employed by you or your company, helped run the company in any way or even contributed business ideas during your marriage, then he or she may be entitled to a substantial percentage of your business. The more involved in your business your spouse was, the bigger that percentage would be. If you have partners in your business, then your spouse would own a percentage of your share.
If for whatever reason you were not able to adequately protect your business and now your spouse is entitled to an ownership interest, here are some ways to pay him or her off (I'm assuming you don't want to be business partners after the divorce):
a. Use your share of other marital assets including cash, stocks, real estate, retirement funds, etc.
b. Property Settlement Note – this is a long-term payout (with interest) of the amount you owe your ex-spouse for the value of her share of the business.
c. Sell the business and divide the sales price. This is obviously the least preferred method, but all too common. When the business represents many of all assets, there just may be no other way to pay-off the other spouse.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
