Imagine yourself as a budding entrepreneur with a great idea. You work hard every day to grow and expand your business. Suddenly you are receiving larger orders as the days and weeks pass. Your work has become your life. In the little free time you have, you go out with friends and eventually, when you least expect it, you meet “the one.” You become married and now both your business and your family are growing.
Fast-forward ten years; Long hours at work have created resentment at home and then the once happy ending has been rewritten to include the dreaded words: I want a divorce.
Your spouse has been there the whole time, through good and bad, while you were building your business. Partitioning out the myriad of emotions and strife that divorce carries with it, for a business owner facing a costly divorce they want to know one thing: what is the bottom line?
To protect your business in a divorce the most important concepts are valuation and business classification. How much is the company worth but more importantly, is this business a marital asset? Pursuant to Pennsylvania law, each party to the divorce must file a pre-trial statement including a list of assets specifying the “marital assets, their value, the date of valuation, whether any portion of the value is non-marital, and any liens or encumbrances thereon…” The statute also calls for the same treatment of non-marital assets. As you can probably imagine, an angry or spurned party in a divorce will not likely readily accept a classification of a family-owned business as a non-marital asset sitting down. This is where valuation and classification are very important. As a disclaimer, it is important to note many of the tips in this article would be best put to use long before a divorce is discussed or even considered.
Upon formation of your business up to the unfortunate day of your divorce, always keep assets of the business separate from those of your own. For example, if you own a successful bakery, all the proceeds from your sales should go into a business account and the salary you take from that business should go into your own personal account. Do not use community funds of your marriage such as combining your incomes to pay business expenses. That opens the door to your spouse citing their participation as a means to claim an equitable distribution upon a divorce; only in this instance they are not getting a participation medal, they are getting a large chunk of the business you have spent so much time building.
Another way to protect yourself is to always have very strong contracts. An article on INC.com titled “How to Protect Your Business in a Divorce” suggests making the risk of divorce an aspect of your business’ operating agreement such as a clause stating that it will be prohibited to transfer shares of a corporation without the approval of the other partners or shareholders and the right of the other principals to purchase the shares or interest in the company so the control of the business is uniform throughout the divorce of one owner. This protects your business and your partners. Another way is to have a soon-to-be spouse of a business owner sign a pre-nuptial agreement surrendering their right to pursue assets of the business in the event of a divorce. In the event that you are a sole proprietor, it may be beneficial to form your business as an LLC or Corporation with you as the sole director and shareholder and in the articles of incorporation, create a clause that would prevent the dissolution of your business if there is a dissolution of your marriage.
To recap, always know the valueofyour business and always keep the value of your business separate from your community property. By keeping the two separate, a judge may be more willing to keep them separate when making a final decision. It is always important to discuss the ramifications your vows will have on your business so that if you do go through a divorce, you can rest easy that the business will be safe from your spouse’s attorney in the inventory of the marital assets.
Joseph D’Agostion is a third-year law student at Widener University in Delaware. He works part-time in the Law Offices of Diana Schimmel, Esq. and is a member of the Pennsylvania Criminal Defense Clinic. Joseph is interested in business and tax law and hopes to pursue an MBA in the near future. He is a lifelong Philadelphian.