by Robert B. Kornitzer, Esq.
In New Jersey, virtually all assets acquired during a marriage (“marital assets”) are divided between the spouses during a divorce. A business is considered such an asset. Exceptions to this rule include inheritances or gifts, which are common in many businesses.
Sometimes, a business owner places the name of his or her spouse on the title of the business, or allows a spouse to build up “sweat equity” by being active in the business. When these things are done, the business owner risks having to give value for the business upon divorce.
The most crucial aspect of protecting one’s business from asset division is the timing of the attempt to protect the business. Here are some common legal ways to protect your business:
- Premarital Agreements (“Prenups”): An agreement by a couple signed prior to marriage, setting forth their rights and obligations in the event of separation or divorce, including support. A prenup can include that the business remains a “separate” asset even after the parties marry. For example, if a family business is going to bring the future son-in-law into the business, this agreement can require him to waive any future ownership claims.
- Trusts: Prepared prior to the marriage and not requiring consent of the future spouse, this provides that ownership of the business (or at least your share of the business) would be placed into a trust that would own the business interests and protect them from division.
- Shareholder Agreements: Also prepared prior to the marriage and not needing consent of the future spouse, these can specify who can own shares and how to value them in the event of a divorce. For example, the groom who works in the “family business” will be required to sign the Shareholder Agreement prior to the marriage to limit the right of the future bride to claim ownership in the business.
- Isolating the Business: A spouse should keep the business operations separate from the marriage. The more a business owner lets the spouse get involved in the pre-marriage business, the more likely the business will become a marital asset open to division.
Once the parties are already married, mid-marriage agreements between spouses that waive one spouse’s interests in the business are very difficult to enforce. There are limited exceptions (one is called a “Reconciliation Agreement”) but it is often an uphill battle to enforce these during a divorce. Therefore, if a business is not completely protected from equitable distribution, what usually happens is one of two things:
1) A Buy-out from other assets: A business-owner spouse exchanges ownership in other assets for the value in the business; or 2) Long-term payout: If business cash flow permits, this method is often preferred by a business owner. If neither of the above is viable, selling the business might be the only option, but this is rarely done.
The best simple rule is for you and your family (if this is a family business) to plan to protect the business while you are still single. Legal requirements need to be carefully followed to ensure the plan is enforceable if challenged.