Attorneys should advise married business owners to prepare a management plan to ensure the business will continue to run smoothly in the event of a divorce.
By Matthew P. Barach, Family Law Trial and Appellate Attorney
Family business ventures can be both rewarding and profitable. Similar values, interests, and goals often make for a successful partnership. However, as with any business, disagreements can arise and lead to legal proceedings. The stakes are higher when the business is owned by a married couple and divorce is on the table.
The couple’s divorce will almost certainly affect business management and operations and may impact other family members including children, siblings, and/or parents, depending on who is involved in the business. To avoid entanglement and further strife, attorneys should advise married business owners and operators in preparing a documented management plan to ensure the business will continue to run smoothly in the event of a divorce.
Potential Pitfalls
When spouses are business partners the potential for the dissolution of the marriage is a factor that must be considered for its effect upon the business. Although it is probably the last thing a couple wants to consider, as owners, the smartest and most responsible way to protect themselves and their assets is to do just that. When working with married business owners, it is important for family law attorneys to prepare the couple for the worst-case scenario. As uncomfortable as it may be planning for all possible potential outcomes can provide peace of mind and guidance in the event of a marriage’s dissolution. And more importantly, allow the business to continue to thrive post-divorce.
If possible, matters of divorce between married co-owners should be anticipated and planned for in pre-or post-marital agreements. Attorneys should encourage their clients to see this as a precautionary, collaborative effort with their spouse, in which they work together to come to an agreement that is suitable for both party’s needs and goals. Creating a prenuptial agreement is about protecting the individual’s respective assets and property.
Ultimately, these arrangements can even help spouses understand each other better and what they value most. Should different needs arise down the road, couples also have the option to alter their agreements, so long as both parties consent. The attorney can arrange for amendments, such as adding or reallocating property while ensuring the agreement remains effective and valid.
The Family Business and Equitable Division
Using these agreements to predetermine property division expectations can facilitate a more peaceable separation, thus helping couples avoid issues and disputes that commonly arise, particularly in high net worth divorces. As an attorney, it is essential to anticipate any and every possible scenario to safeguard clients in all matters of a marriage’s dissolution.
Business ownership between spouses can exist in many forms, including joint ownership. Alternatively, a spouse may be a stakeholder whose ownership is affected although they are not party to the divorce, or they may acquire business shares as marital property but remain a non-owner.
The laws of equitable distribution require that all properties must be distributed fairly, based on each spouse’s contribution and earning power. Couples must take into consideration the difference between marital property and what is separate property. Marital property will encompass every asset in the financial sense, including any debts incurred while they were married. Therefore, each spouse must compromise when determining what is considered marital property and how they wish to divide it.
Depending on the situation, this can be a relatively straightforward process, especially if the couple shared few properties. However, there are times when couples cannot form an agreement, which can often lead to a contentious divorce and undesirable outcomes for the business itself.
In the division of assets, deciding the fate of the co-owned business is complicated in that the proceedings will be determined by both business and family law. The business will inevitably be one of the couple’s largest, if not the largest shared assets. Therefore, how the division is determined is paramount to both parties’ economic stability. Every closely held business should have incorporation documents detailing ownership rights and stakeholder value that will be implemented if and when the owners legally divorce. Family lawyers should also prepare and execute documents for succession planning that detail the course of action in the event of the succeeding owner’s divorce.
Possible Solutions
Typically, the best option for divorcing business owners is to keep the business open. Attorneys should analyze the full scope of possible resolutions to avoid shutting down the business entirely. First and foremost, a couple may be in a position to carry on as co-owners of the business. If this is not possible, there are several options that can make for up for a clean break, including:
- One spouse may choose to buy out the other spouse.
- If the divorce settlement has left a spouse with shares in the company, they may choose to sell them back to the other spouse.
- Without proper arrangements, and if the divorcing couple cannot agree on any of the above terms, the only option may be to sell the business to a third party. Although this is often the simplest solution, the financial implications are less than desirable.
- If the business has more than one unit or real estate asset, the divorcing couple may be able to divide the company.
Divorce proceedings are riddled with complications and hurdles and often arise when they are least expected. When working with clients who are embarking on any business venture with a current or future spouse, family law attorneys should present the range of possible options for potential dissolution of the marriage and the business. Embarking on a new business venture can be a financially complicated move, only made more so by unexpected spousal feuds. With the appropriate preliminary arrangements, attorneys can assist their clients in eliminating any anxieties surrounding the uncertainty of divorce among owners.
References
www.fbaedu.com/2018/02/14/the-effect-of-divorce-on-a-family-business
www.americanbar.org/groups/business_law/publications/blt/2015/02/01_means
Matthew P. Barach is a family law trial attorney and appellate family law specialist. The founder and principal of Barach Family Law Group in Massachusetts, he is the author of The Family Law Guide to Appellate Practice (ABA Book Publishing, 2019). www.barachfamilylaw.com
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