Don’t risk your business getting destroyed to pay off your spouse in a divorce!

Whether you started your business before marriage, or you and your spouse started it together, under California law your spouse will likely end up entitled to 50 percent of the value of the business if you divorce. This means you will either have to live with your spouse as an equal business partner for the rest of your life, or else buy them out. Unless, that is, you have utilized some of the following strategies to protect your business.

Prenuptial Agreements

For individuals who bring a business into the marriage, it is wise to draft a prenup that specifies how the business will be handled in the event of a divorce. You need to make sure that you get the prenup in writing and have witnesses that can testify it was signed willingly by both parties. Unfortunately, prenups are not ironclad and your spouse may be able to override it in a divorce battle, especially if the asset division is extremely lopsided.

Postnuptial Agreements

If you neglected to create a prenup before marriage, you can use a postnuptial agreement for the same purpose. Postnups are hard to enforce if one spouse decides to disregard them, but they are better than nothing.

Lockout Agreements

You can also consider including provisions in your partnership, shareholder, or LLC agreement that will give your business partners the right to purchase your ex’s share of the business to prevent that person from gaining a controlling interest in the business.

Pay Yourself a Competitive Salary

If you put all your profits back into the business rather than paying yourself a competitive salary, your spouse might be able to argue that they deserve a greater portion of the value of the business to compensate for the income that would have otherwise benefited the household.

Don’t Involve Your Spouse in the Business

The more work your spouse does for the business, the more likely they are to claim they deserve a greater portion of its value. If your spouse must be involved, pay them a fair salary for their work.

Paying Off Your Spouse

If your spouse does end up getting a portion of your business in your divorce, and you don’t want to work with them, you need to pay them off. Hopefully you will be able to liquidate personal assets in order to do this, rather than business assets. You should also consider a property settlement note. If your ex is open to a long-term payout with interest, this will give you more time to pay them off and help protect your business from a sudden shock.