Many people work for themselves today, and many of these people run successful businesses that may employ a great number of people. What happens to the ownership or profits of a business once a business owner marries? What happens during divorce?
Recently, Forbes ran a very interesting article highlighting two women who had successful businesses they created prior to marriage, and both went through a divorce. One woman protected her business and kept it all after divorce; the other woman did not have the same protection and lost her share of the business to her husband in the divorce.
How could this happen?
In Missouri, courts treat marital property very broadly: any assets, including income for employment, growth in investments, purchasing shares in a company – all become marital property by presumption if they accrued during the marriage. However, some property that is presumed marital can be classified as separate property if certain precautions are taken.
The best tool to designate a business as separate property of one spouse is a prenuptial agreement that states clearly that the ownership of the business, all of its assets and stock, even its profits if desired, remain the property of that spouse. However, the separate spouse must be careful to segregate all accounting records of the business and not commingle assets. If the business is a limited liability company or sole proprietorship, it will have tax consequences that redound to the marriage. One way to safeguard any questions in the event of a divorce would be to repay the other spouse any taxes incurred by the business appearing as a taxable item (perhaps from a K-1) on the joint federal return.
Another good idea would be to consult with an accountant and/or business attorney about different corporate forms and how that could protect the company in the event of a divorce. Corporate structure is too complicated to address in a single blog post, but suffice it to say, alternatives do exist that could make it safe from the other spouse.
As the stories in the Forbes article indicate, the stakes can be very high if a successful person wants to retain ownership and control of a business after a divorce. Think and act ahead.
If you have questions about protecting your business during a divorce, contact us – we can help.