In most cases, when a couple decides to get married, they are not thinking about what could happen if the marriage fails later down the road. In California, any business or company formed during a marriage is considered community property, also called “marital property.”
What does that mean exactly? It means if you are a business owner and decide to get divorced, your spouse is entitled to half of the value of the business.
Perhaps you are the owner of a high-asset or high-net-worth company? Maybe you are a professional practice owner, such as a medical office? Perhaps you are a lawyer with a private practice?
In that case, the division of assets during divorce can be pretty substantial. Often, a business owner who has to split half the value of their company can't financially recover, and they lose their business.
Thus, a prenuptial agreement, also called a premarital agreement, is an essential consideration for anyone entering a marriage while owning their own business. This includes:
- S corporations,
- sole proprietorships,
- limited liability companies (LLC),
- real estate business, and
- small family businesses.
Many business owners consider a prenup before marriage but are often reluctant to ask for such an agreement because it suggests a distrust of their soon-to-be spouse. In other words, asking for a prenup could get them in the dog house before they even get married.
This means your verbal approach should be carefully worded to focus on ensuring the business's survival in the unlikely event of a divorce. Perhaps you could present the prenup agreement as a type of business transaction. Our California divorce and family law lawyers will examine this subject further below.
What Are the Benefits of a Prenuptial Agreement?
As mentioned, bringing up the subject of prenuptial agreements with a partner is not always easy, but it could resolve significant issues before they even happen later. Prenuptial agreements for business owners can provide numerous long-term benefits, including:
- Defines assets - it can specifically list the business as non-marital property, and any values increases will not be subjected to division in divorce;
- Division of assets - it can specify which spouse is entitled to certain assets in case of a divorce but usually requires a spousal support agreement;
- Defines who controls the business - a prenup agreement can even specifically list that you will maintain the right to manage the business;
- Business planning - they can list desired business beneficiaries in the unfortunate event of death by the owner.
Readers should note that you could still modify a prenuptial agreement after you get married. Further, you can create a postnuptial agreement if there was no legal agreement before marriage.
What Information Should Be Included in a Prenuptial Agreement?
For a California prenuptial agreement to be legally enforceable, you must ensure it's properly created and agreed upon. A family law court might determine a premarital agreement is not enforceable if it was not executed voluntarily. Thus, the prenuptial agreement should include the following:
- Both spouses had separate independent legal counsel;
- Both spouses were given financial disclosures over assets and liabilities;
- Whether you want to buy out your spouse's business interest;
- What specific rights are a spouse waiving in the agreement;
- Both spouses signed the prenup voluntarily without any coercion;
- List earnings and property as either separate or community property;
- How to handle property and income acquired during the marriage;
- How to handle life insurance, retirement plans, and investment accounts;
- How to divide the business in case of the owner's death;
- Which spouse will have control of the business assets in case of divorce;
- How you want your spouse to be involved in the business, if at all;
- Whether you can still work together to run the company after divorce;
- List whether to file joint or separate income tax returns.
What You Need to Know About Prenuptial Agreements
Before you decide to get married to someone who owns their own business, both spouses should consider hiring their independent lawyers before they make a prenuptial agreement to prevent any conflict of interest.
Both spouses must provide accurate financial disclosures about all their income and liabilities. If you intentionally fail to disclose assets, the agreement may not be enforceable. Prenups are not public information unless there is litigation.
You must carefully draft the prenup language and list both spouses' legal rights, obligations, and any waivers related to their marriage. You should NOT include language that could be considered:
- advantageous to just one spouse,
- taking advantage, and
- encourage a divorce.
Any proposed agreements must be presented before the wedding, typically signed a least one month before the marriage. The prenuptial agreement must be reviewed and signed by both spouses voluntarily without any pressure or influence.
You may not be surprised to learn that it's not uncommon for a California prenup draft to be so one-sided that it's considered unconscionable by the family court. In other words, it's not reasonable or enforceable. You need to understand some provisions cannot be included in a postnuptial agreement.
If you are a high-net-worth business owner preparing to get married and need to draft a prenuptial agreement, we can help you. Ensure the agreement addresses your business concerns and protects your interest.
If you are already married and a business owner, then a postnuptial agreement could be drafted and signed to protect your company in a divorce. A postnuptial agreement is similar to a prenuptial, but it lists the marital rights between spouses after the marriage.
If your spouse has an ownership interest in the company and you don't want to continue as partners after the divorce, you can use other marital assets to buy out their share of the company. If a suitable mutual agreement can't be reached, you may be forced to sell the company and divide the assets equally.
Your spouse could attempt to inflate their actual contributions to a business or acquire an appraisal that overvalues the company to obtain a larger buyout. If you have questions about a postnuptial business agreement, give us a call to review all the details and legal options.
Furman & Zavatsky are Los Angeles divorce and family law attorneys who provide legal representation across the state of California. We offer a free case review by phone or use the contact form.