For most people, the single biggest asset they have aside from their home is the business they own. If you started your business before you were married, you may be surprised to learn that the business may become part of the marriage dissolution negotiations. That is possible even if you were the only person whose hard work, valuable time and treasure went into making the business successful.
When Should I Start Protecting My Business From Divorce Proceedings?
The short answer is from day one.
Louisiana divorce law recognizes both separate property and community property. How your property is titled does not determine whether it is separate property or community (marital) property. The default rule in Louisiana is that married couples own property as community property. Community property includes all property acquired during the marriage through the skill, efforts, and work of both or either spouse. Separate property that loses its identity due to commingling becomes community property. The community property rules determine how assets are divided between the spouses when the community property terminates. Community property terminates upon divorce so that means that your spouse may have a right to at least a portion of the value of business assets that you own. Community property is valued at the time of the community property settlement, or at the time a judge partitions the property.
Mercifully, the law also allows couples to opt-out of the marital property rules. If you started your business before the marriage, there are things you can do to make it apparent to everyone (especially a judge)that the business is your separate property, not subject to the claims of your divorcing spouse.
- Enter into a matrimonial agreement (also known as a prenuptial agreement). It may not seem the most romantic act, but a prenuptial agreement makes good sense when you have expended considerable time, money, and effort into a business before even meeting your spouse. A prenuptial agreement is a written contract that is enforceable by law. Discuss in detail with your future spouse what would happen to your business in the event of a divorce. Then, reduce the agreed-upon specifics to a writing signed by both of you. If your fiancé acknowledges that your business is a separate asset and not community property before the marriage, he or she cannot argue that the business is community property later. A prenuptial agreement is arguably the least expensive way to protect your business assets from distribution upon divorce.
- Be scrupulous about record-keeping. During the divorce, the judge will look at whether and how much of the family treasury was funneled into your business. Keeping separate business records that show that family finances were kept separate from business finances will go a long way to protecting your business assets from the ravages of divorce.
Can I Protect A Business I Started After Marriage?
If you started your business after marriage, or if it became more valuable after you married, there are still steps you can take to minimize the impact of divorce on the business assets and profits. If you are married and you haven't yet started the business, take care that you declare in all sales agreements, financial documents, and other business documents that you are buying the property with separate assets. Have your spouse acknowledge in those documents that the property is a separate property in which the spouse has no legal interest.
If you are married and the business is already a going concern, there are still steps you can take. Remember, matrimonial agreements are not necessarily entered into before marriage. If your spouse acknowledges after the marriage, in a post-nuptial agreement, that the business is your separate asset not subject to community property laws, your spouse cannot at the time of divorce change the character of the asset.
How Do I Maintain My Spouse's Distance From the Business?
One of the best ways to demonstrate your spouse's distance from your separate business is to keep your spouse from working in the business right from the beginning. If your spouse already has a position in your business, you have a choice: fire your spouse (not an easy thing to do) or severely curtail the spouse's part to a bit role.
Either of the above changes should occur as soon as possible. At the time of the divorce, the judge will look at how long the spouse worked in the business and how much impact the spouse's endeavors had on the success of your business. Either of those things may lead to a decision that your spouse is entitled to share in the business's profits.
Is It Bad To Pour All Profits Back into the Business?
The answer depends on how your spouse perceives the decision. If your spouse argues that you did not contribute to maintaining the familial household because you poured all the profits back into the business, then on dissolution the judge may see him or her as entitled to a share of the business's profits. So, to protect your business from such a claim, it is a good idea to pay yourself a competitive salary out of the business's profits. That way, you accomplish two things: you can contribute your share to the family coffers to help maintain the familial household while you continue to put the remainder of the profits back into your separate business to engender future growth.
What happens if I didn't do these things and am now in the middle of a divorce?
Negotiate. Negotiate. Negotiate. If you find yourself in preliminary divorce activity, you will find that negotiation skills are at a premium. At this point, trying to save your business profits, both current and future, may mean deciding on what other community property you are willing to give your rights away. For example, you may be willing to give your spouse 100% of the family home. You may have securities or other assets that you are willing to surrender. You might be willing to give these rights away in exchange for 100% ownership of the business assets and profits.
A Word of Warning.
Divorce negotiations can become complicated very quickly. It is best to retain an attorney skilled in divorce cases, to help you navigate the stormy waters. Besides, you have enough to do with running your business and trying to keep the peace with your soon-to-be-ex-spouse. Call our office today at (504) 561-8700 to schedule your initial consultation with an experienced divorce attorney.