Suppose you own a business in California and planning to get married. In that case, you need to consider a prenuptial agreement to protect your interest in the company if the marriage fails later.
Perhaps your spouse will be joining the business as a partner. Still, you will need to draft a prenuptial agreement outlining what will happen to the company, and the assets should a divorce occur.
Perhaps you were already married when you started a new business. In that case, you should consider a postnuptial agreement stating what will happen in case of a divorce.
In a California divorce, your business is an asset that will be evaluated as part of your marital settlement agreement. Suppose your spouse contributed to the growth of the business during your marriage.
In that case, it could be declared a marital asset and subject to equitable division as part of the divorce under California law. You might be forced to sell your business or buy your spouse's interest.
In other words, there are many valid reasons for any business owner who is getting married to reasons to establish a prenuptial agreement in California. The primary goal is to protect an existing business you bring into the marriage.
Of course, most business owners rarely even think of the word “divorce” when they are just now making happy plans to get married. How could you ask for a prenup now?
These are valid issues, but in reality and according to statistics, you risk a more significant loss with every passing year without a prenup. Our California family law lawyers will look closely at this topic below.
What Are the Benefits of a Prenuptial Agreement?
Regardless of current emotions over the upcoming marriage, a prenuptial agreement is an essential consideration for anyone entering into marriage while simultaneously owning their own business or professional practice.
You will need to find a way to convey to your soon-to-be spouse that the request for a prenup is not a sign of distrust but rather a routine agreement that focuses on the company's survival in the unlikely event of a divorce. In other words, you should ensure that the deal is just a business transaction.
If you own a high-asset company, prenuptial agreements provide numerous long-term benefits, such as:
- Define assets in case of divorce, including marital and non-marital assets, and lays out in detail that your business will be separate property and that any of the business value will not be divided with your spouse;
- Asset division can be included in a prenup that will lay out precisely which spouse is entitled to specific assets in a divorce, but when one spouse has more assets, they will probably have to pay spousal support;
- Confirms which spouse will keep ownership of the business and operate the daily company activities;
- List all of the property and assets brought into the marriage and which will be considered marital or separate property;
- List income and other earnings as community or separate property;
- How property jointly acquired during the marriage will be handled;
- How life insurance and retirement plans before marriage is handled;
- Defines whether spouses will file joint or separate income tax returns.
Prenuptial agreements can be modified after the marriage as it's common for the circumstances to change. As noted above, you also have the option to create a postnuptial agreement if you were already married when you started the business.
How Should You Structure a Prenup to Protect Your Business?
To make a prenuptial agreement enforceable, you must ensure it's valid. A California family court could deny a prenup if it were not executed voluntarily or the agreement was too one-sided.
Both spouses, who had their independent counsel, must voluntarily agree without any issues about coercion or duress.
The language in the prenup must detail any rights either spouse is waiving and that financial disclosures be provided regarding incomes, assets, and debts. What are the issues that are generally addressed in a prenuptial agreement? Some of the critical concepts are going to include:
- List a company's value at the date of marriage to ensure any business value that is subjected to division is limited to the gain during the marriage;
- List indirect business contributions to show how your spouse helped the company grow by staying at home to raise your children;
- List the business valuation method that will be used in the case of divorce, as multiple methods can be used;
- List a fair amount of compensation to the non-owner spouse based on regular market values;
- List a specific percentage of the company to your spouse regardless of their participation or contribution;
- List that the company is a separate asset and not subject to asset division in a divorce or separation;
- List the rights to appreciation and depreciation of the company from the date of marriage;
- List the exchange of property or other assets of equal value to buy out your spouse's interest in the business.
What Other Issues Should You Know About?
A prenuptial agreement has to be fair and signed by your spouse without any coercion to be valid. California family courts are well aware of duress tactics used by a spouse and are on the lookout for business prenups that heavily favors one spouse. They can deny a prenup.
You and your soon-to-be spouse should have separate family law attorneys to protect your interests and avoid any conflict of interest. Suppose you draft a prenup agreement that excludes your spouse from having any interest or equity in your company.
In that case, they should not be involved with the daily operating procedures. If your spouse contributed to the growth of your business in some manner, they could claim a portion of the assets.
The company earnings need to have a separate account rather than the profits for personal use as comingled assets could be considered marital wealth to be divided in a divorce. If you have business partners, you should create agreements that require them o have prenuptial agreements or list the buy-out details in the event of their divorce.
Both spouses must provide accurate financial disclosures, including their respective income and liabilities. Failure to fully disclose assets and liabilities could lead to an unenforceable prenuptial agreement.
Any proposed prenups should be drafted and presented well before the wedding and signed at least 30 days before the marriage. If you are preparing for marriage and need assistance drafting a prenuptial agreement, our Los Angeles family law attorneys can help you.
If you own a business, it's probably your most valuable asset and the primary souse of income. This means you would be wise to protect it. On the flip side, if you are interested in your spouse's company, you also have legal rights. You need to understand some provisions cannot be included in a postnuptial agreement.
Furman & Zavatsky understand the often complicated issue of dividing business assets in a California divorce. You can contact our firm by using the online form or call us for a free case evaluation.
