Protecting your business from a potential divorce

The line between your personal life and your business can be blurry. This is especially true for business owners who go through a divorce.

Community property in California

California is a community property state when it comes to property division in a divorce. This means that both spouses have an equal ownership interest in any property that was obtained during the course of the marriage and any property that appreciated in value during the course of the marriage. All of this community property will become part of the divisible estate in the event of a divorce, meaning that if appropriate precautions are not taken your ownership interest in your business could be at stake.

Prenups and postnups to protect your business

One way to protect your business from the get-go is to execute a prenuptial agreement prior to marrying. In a prenup you can designate your business and any future earnings as separate property that you will keep in the event of a divorce. It is essential that you are represented by an attorney when executing a prenup, to ensure you understand your rights and the resulting document is legally sound.

A postnuptial agreement is essentially the same as a prenup, but it is executed after you marry. Postnups, like prenups, are effective only if they are in writing, executed voluntarily, there is a full disclosure of assets, and the terms are not unconscionable.

Other ways to protect your business

Prenups and postnups are good ways to protect your interest in your business from the property division phase of your divorce. Partnership agreements, shareholder agreements and/or operating agreements can also be drafted to include prohibition of transfers without the approval of other partners or to include buy-sell agreements. These are also ways to protect your business should you divorce.

Ultimately, it is best to be proactive. Work with your fiancé or spouse to draft a prenup or postnup. Work with your business partners or shareholders to draft arrangements for how business interests will be handled in a divorce. Doing so can help ensure your business that you work so hard for will not wind up in the hands of your ex.