Marriage and prenuptial agreements are rarely ever a consideration for budding entrepreneurs when starting their business. Understandably, their minds are more focused on perfecting their product or service and fleshing out their business plan. However by overlooking the threat of a divorce, an entrepreneur can unwittingly be putting their business in unnecessary danger.
A Divorce Can Ruin a Business
Most business owners don’t consider the crippling effects that a divorce can have on their company until it’s too late. They often assume that because they started the company before they were married, they are regarded as the sole owner. While this is, in fact, correct, relying on this idea gives business owners a false sense of security and leads them to overlook nuances of divorce law.
For one, your spouse is eligible for up to half of the appreciation in value that your business accrues over the duration of your marriage. Put simply, if your business was worth $50,000 before marriage and $100,000 when you decided to get a divorce, your spouse would be entitled to half of the $50,000 increase in value. It’s important to note that calculating appreciation can get tricky and largely depends on whether it is active or passive appreciation.
Depending on the state you live in or the ruling of the divorce court you may also become liable for your spouse’s debt, even if it was incurred solely under their name. This means that in some cases your spouse’s creditors can come after you and your business in order to settle the debt. Even if your company is categorized as an LLC, there are still ways that creditors can get their money from your business.
Just imagine how devastating it would be to lose half of the value your company’s appreciation or ownership of your stake in the business. In these situations, it is likely that assets would need to be liquated, employees would have to be let go, and the company would need to shut its doors.
How a Prenup Can Help
A prenuptial agreement is a contract between two people that is established before their marriage. Prenups outline how property will be divided in the event of a divorce. While a prenup can cover all kinds of property from furniture and artwork to retirement accounts and IP rights, there are a couple of clauses that you can add that will help ensure the survival of your business.
For example, when drafting a prenup you and your spouse can decide how to address the appreciation of your pre-marital assets. This will allow you to include a provision that waives your spouse’s eligibility to any appreciated value of your business. Keep in mind that this is a give-and-take process that will require compromise. If you waive your spouse's entitlement to appreciation, you will likely be required to outline another way you will fairly compensate them for their share of the appreciation.
Prenuptial agreements can also be used to limit your liability for a spouse’s debts. While you are not on the hook for any debts that your spouse accumulated before the marriage, depending on the state, you could be liable for debt taken on during the marriage. Even if your spouse acquired the debt in their name only, it could still be considered collective debt if the purchase can be judged as beneficial to the marriage.
A prenup will allow you and your spouse to decide how to divide shared debt. Additionally, you can include a clause that ensures that neither of you is liable for additional debt that was solely created by the other. Without a prenup, not only will creditors be able to go after marital or shared property, but also as mentioned earlier, they could even go after your business.
When most entrepreneurs think about business, prenups rarely come to mind. Although it may be unromantic or uncomfortable to talk about, in the end, the fate of your business could rest on your decision. Remember that it’s not just you who will be affected by divorce. Your employees, business partners, and customers will also suffer if your business is lost in a nasty divorce.
Taylor Johnson is a serial entrepreneur and a small business expert at Legaltemplates.net, which provides cutting-edge technology to create free legal documents simply and quickly.