The importance of protecting your California business during a divorce

Divorce is a challenging time. In addition to emotional and physical turmoil while you process the end of your marriage, move to a new residence and try to maintain a relationship with your children, you have to worry about the financial ramifications of the split. These financial concerns are important to everyone, but for owners of family businesses, closely-held corporations and professional practices, they take on a new level of significance.

It is by no means certain or inevitable that your business will be significantly impacted by a divorce. There are methods by which you can “divorce-proof” your business or practice to insulate it as much as possible from the fallout.

An ounce of prevention…

One of the easiest ways to protect a family business, partnership, corporation or professional practice is with a comprehensive prenuptial agreement. A valid, enforceable prenuptial agreement (also known as a “premarital agreement” or an “antenuptial agreement”) can be used to dictate that one spouse’s business is to remain separate property in the event that the couple divorces. To be enforceable, a prenuptial agreement must:

  • Be in writing
  • Be signed by both parties, neither of which was under duress at the time
  • Be signed in a timely manner prior to the wedding (an agreement thrust upon one spouse the night before the wedding with no advance notice could be considered coercive, something that could invalidate the entire document if it is challenged in the future)
  • Be void of any illegal or immoral clauses
  • Not attempt to contract away one party’s rights to seek custody or visitation with any children the couple may have, or to prevent one party from seeking child support

Not all couples have the forethought to sign a prenuptial agreement, and other couples have found themselves in a position where they acquired assets they want to protect after the wedding has already occurred. If so, these couples aren’t left with only California’s “community property” laws to guide them should they split. A “postnuptial agreement” signed after the couple has already married can serve the same purpose.

Careful structuring

As helpful as they are, prenuptial and postnuptial agreements are not appropriate for every family business or professional practice situation. Another option would be to carefully structure the operating documents of the business itself with partnership, shareholder, LLC or buy/sell agreements. These could effectively “lock out” claims against the business brought by the divorcing spouse of one owner, partner or major shareholder.

In addition, basic steps taken during the marriage, like taking a salary from the business and taking care to not co-mingle business and personal funds, can protect the business from being considered as marital property. It may still be possible for a spouse to receive a portion of the business’ income during the length of the marriage, but by keeping the business separate, ownership might not need to transfer in a divorce.

“Divorce-proofing” your business is a complicated process. You need the advice and assistance of someone well-versed with the different ways in which business assets and ownership can be affected by a divorce so that you can anticipate how your own business would fare in such a situation. A California family law attorney can help you protect your company now so that your business will thrive, even if your marriage is one of the approximately 52 percent of first marriages or 70 percent of subsequent marriages that fail.