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Triangle Smart Divorce
For small business owners, both marriage and divorce bring unique challenges that can impact their business’ stability, growth, and future success. Understanding and planning for these potential implications can protect your business interests and financial well-being.
While it’s important for everyone to thoroughly consider the financial implications of both marriage and divorce before they dive into either, it’s especially critical for small business owners. Both life transitions can add layers of complexity to the productivity and longevity of the business, as well as create unique obstacles for the owners, business partners, and other stakeholders.
We’ve worked with too many clients who realized, only after the fact, just how intertwined their personal and professional lives had become. Almost all of them wished they had taken steps sooner to protect all the hard work and dedication they had poured into building their business.
To safeguard your business assets, maintain control, and position yourself for future business growth, there are a few considerations every business owner should explore. In this blog, we’ll share essential insights to help small business owners prepare for marriage or divorce.
First off, it is important for you to understand how a small business is classified when it comes to separate vs. marital property in North Carolina. Our state is not a “community property” state, in which marital property is legally considered jointly owned by both spouses, and therefore subject to an equal 50/50 division upon divorce.
Instead, North Carolina practices what is known as “equitable distribution,” which means that each spouse is entitled to a “fair” division of the assets. Some assets may be considered separate property if they were acquired by one spouse before the marriage or were inheritances/gifts given specifically to them; however, assets and debts acquired during the marriage (regardless of how they are titled) are considered marital property.
You might think this would mean that if you owned your business before you and your spouse got married, then it will likely be recognized as your separate property upon divorce, while a business that began after you were married will generally be recognized as marital property.
Not so fast! The presumption in North Carolina for all property is that if it is owned on the date you separate, then it is marital property, and YOU, as the spouse wanting it to be separate or partially separate, must convince the Court with facts and evidence that the asset is not marital or at least that part of it isn’t marital to overcome that presumption.
What does that really mean without all the lawyer words? Basically, if you owned your business before marriage you need to be aware that the entire thing will be considered marital property unless you can show otherwise. Any growth of the business that occurs during your marriage will be considered marital property, whether the business itself is separate or not, unless you can convince a Court that the growth is due to purely passive forces that you had nothing to do with. Good luck with that if you have an active, thriving business.
Why is business growth in value considered marital? Because in many cases, it can be assumed that both spouses contribute to the business’s growth, either directly or indirectly, whether through their time, effort, funds, or other forms of support, including doing more of the day-to-day with the household or the children so the other spouse has additional time to run, manage, and grow the business.
For example, let’s say one spouse owned a business at the time of their marriage that was valued at $50,000. For the sake of this example, there was no prenup or postnup in play here. Then, ten years later when they decide to get divorced, the business was valued at $100,000. IF the owner spouse can prove the premarital value was $50,000, but cannot prove that the increase in value of the business was due to passive forces, then the non-owner spouse is entitled to a fair share of the $50,000 growth in value.
This is a critical concept to understand as you prepare for marriage or divorce as a small business owner, which is why you need to be aware of all the options available to you that can protect your business and its assets.
Tools like prenups and postnups are the first step in protecting the future of your business. Prenups, or prenuptial agreements, are legal contracts spouses sign before getting married to outline their financial rights and responsibilities during the marriage, as well as how money and property will be divided in the event of divorce or death.
As a small business owner, we highly recommend you have a prenup in place before tying the knot. As we already discussed, without a prenup, your spouse is likely entitled to a share of the business growth that occurs during your marriage, even if you owned the business before you got married. So, if you want to protect those assets, there are a few ways you can structure your prenup:
This strong recommendation should also be shared with any business partners you may have. If they are planning to get married, you should discuss whether or not they plan to get a prenup and how they will clarify how business assets will be handled upon divorce. Obviously, you can’t control what another person chooses to do, so if they or their soon-to-be spouse are staunchly against getting a prenup, there are other legal tools (like operating agreements or buy/sell agreements) that you can put into place to protect both business partners’ interests. Additionally, in a prenup (at least the business documents) you should address what happens upon the death of one of the business partners, as you may not wish to own the business with your partner’s surviving family members.
Moreover, you can also use your prenup to set alimony expectations in the event that you get divorced. The family courts of North Carolina examine various financial aspects when determining alimony payments. For a business owner, this may include income generated by the business, as well as any perks and benefits you get from your business, no matter how “low” you keep your salary. So, reaching an agreement on alimony and clearly defining those terms in your prenup can save you from being financially taken advantage of later on down the road. If both parties agree, you can waive alimony in a prenup to eliminate that financial uncertainty from your future.
If you are already married and therefore missed your opportunity to get a prenup, you can always get a postnup, or a postnuptial agreement, which essentially functions in the same way as a prenup. However, one major difference is that postnups can only address alimony in very specific circumstances (typically when there has been a physical separation of the parties), so be sure to consult with an experienced North Carolina postnup lawyer to be sure your postnup will stand up and not contain invalid provisions. Coupling a postnup with solid terms about separation, divorce, and death in your operating agreement and buy-sell agreement can go a long way to protect that business you worked so hard to build.
Another aspect to consider before getting married as a small business owner is how it will impact your business taxes as well as your personal finances. The best way to gather the necessary insights you need is to work closely with a professional tax advisor. They will be able to help you better understand what deductions you do and do not qualify for, which deductions you can maximize, how to mitigate taxes, and other critical considerations.
Prior to your marriage or soon after it, you should also take time to update your estate planning documents (like your will, trust, etc.) to include your spouse and any other beneficiaries, as well as your business succession plan. This will ensure that your business interests are protected upon death or divorce and that your wishes will be honored.
Whether you owned the business before you got married or not, your spouse might be entitled to some portion of the value or assets upon divorce. Therefore, one of the first things you want to do is get your business valued. Professional financial experts can give you an evaluation of what your business is worth.
Be warned. Your business value may not be what you think it is if you have been under- or over-paying yourself or if you have been running a lot of perks (even if IRS-sanctioned) through the business. Getting an accurate value of your business and the income it generates is not only essential for asset division purposes, but for alimony calculations, as well.
Judges will rarely order a small business to be distributed to the non-entrepreneurial spouse (this mainly depends on the business entity’s structure, if there are other owners, and if the other spouse has the skill set to run the business), so you’ll need to be prepared to buy out your spouse’s share in the business (which is where the valuation comes in). You can mediate or negotiate with your spouse to determine a buy-out option you both agree on. Options here include a lump-sum payment, payments overtime, offsetting the business value with another asset, or other creative solutions which you both agree to.
Finally, consider how you will maintain business operations and minimize productivity disruptions while you and your spouse are engaged in divorce proceedings. As you can imagine, divorce proceedings take up a significant amount of time and mental energy, as well as capital, which may cause your business to suffer. In addition to your divorce attorney, business attorneys and advisors can play an invaluable role in helping you maintain continuity during this time and reduce the impact divorce has on your operations and your bottom line.
After divorce, you’ll need to determine how best to advance your business as a single individual. This may involve a bit of restructuring, especially if your spouse played a larger role in the operations of your business. You may consider taking in a partner, hiring other workers to lighten your load, seeking outside investments or funding, or expanding your service offerings. Again, this is where financial advisors and business lawyers can be instrumental in the long-term growth and stability of your business.
One of our main goals is to protect smart people from making stupid mistakes when getting married and divorced, and as a business owner, as you know, there are a lot of mistakes you can make. We are a small business, just like you, and we’ve made mistakes along the way as well. We’ve learned from our clients’ mistakes, too. You don’t have to repeat the same ones. We’re here to help you steer clear of them and protect what’s most important to you. Your business represents not only your life’s passion but your livelihood and your future financial prosperity.
You can count on our highly experienced team of divorce attorneys to put you and your business in the best possible position – not just to survive whatever life throws at you, but to thrive! Call today to request your consultation and learn more about how we can help you prepare for the next chapter of your life.
You don’t have to have everything figured out to reach out. Let’s start with a conversation.
(919) 642-1876
(919) 642-1876