People do not usually get married thinking about a divorce down the road. Divorce is emotional for one or both parties and brings about many adjustments and changes that may not have been contemplated but are now at the forefront. When divorce happens, everything is in play. In New York, equitable distribution laws determine how the marital assets will be divided, including a business established before or during marriage. Developing a plan that protects your business prior to marriage or, if during the marriage, as soon as the business is established.
There are several steps you can take to protect your business in the event of a divorce. If you have an already established business prior to a marriage, it makes sense to have a prenuptial agreement drawn up detailing how the business assets will be treated in the event of a divorce. The purpose of a prenuptial agreement is to limit a spouse’s claim to its value or appreciation. The prenuptial agreement should state with specificity that the business, as well as any equipment, property owned by the business, etc., is separate property that is not included in equitable distribution. Moreover, this agreement can establish business value at the date of marriage, detailing how future appreciation will be handled and specifying that business earnings are distinct from marital funds. The prenuptial agreement should also address what role, if any, the spouse would have in the business and whether they would be entitled to a specific percentage of the business in the event of divorce.
If the business is being created during the marriage, a postnuptial agreement serves a similar purpose and is recommended. Whether you use a prenuptial or postnuptial agreement, it should be prepared by an attorney, and the spouse should retain their own attorney to review it before it is signed and acknowledged. These agreements, if drawn up correctly, are legally binding. Whether you use a prenuptial or postnuptial agreement, the original should be kept in a safe place so that it is not lost or destroyed.
Another layer of protection would be to consider a business structure such as a sole proprietorship, partnership, or limited liability company. You should consult with a legal professional to determine which structure would best protect your assets. If there is more than one owner, a shareholder agreement would be beneficial in outlining how shares would be treated in the event of divorce. For example, a shareholder agreement can require the consent of other shareholders to transfer shares to a spouse in a divorce.
Do not combine your personal finances with business finances. The quickest way to convert separate property to marital property is to co-mingle your personal and business finances. Keep separate bank accounts for your personal expenses and one for the business. Some other best practices, all of which would further demonstrate that the business is separate property, include:
- Do not use the business account or business credit cards to pay for personal expenses
- Keep accurate business records for payroll, benefits, etc.
- Avoid using marital funds to support the business.
- Keep the business records at your business, not at your home.
Being proactive and implementing certain safeguards can be beneficial in preventing future disputes over ownership and valuation.
Anastasia Rivera-Bonilla, Esq., is senior counsel at J&G Law, concentrating in family and matrimonial law. She can be reached at [email protected] or by calling (845)764-9656.