Will a Prenup Protect My Business?

If you’re a business owner, you know just how hard you’ve worked to make your company into what it is today. All of your inspiration, effort, and toil day-in and day-out – that’s the priceless equity you paid into your company, which returns the cash you need to build the life you deserve.

Being a business owner means thinking ahead and strategically placing yourself in the best place possible to seize opportunities and mitigate the impact of calamity. You’d do anything to protect your business – but would you propose a prenup to the love of your life?

Your Spouse Can Take Half of Your Company

Divorce affects business owners differently than anyone else. They have a lot more to lose because they can lose nearly everything they’ve worked so hard to achieve – especially if they didn’t take steps to protect their companies before getting married.

Because California is a community property state, spouses each have a 50% interest in the marital estate. If your spouse is able to convince the court that they have an ownership interest in your company, you could be forced into a 50/50 partnership with them. As you might guess, companies that attempt to survive with ex-spouses as co-owners don’t thrive for long before sputtering out.

There are also cases where a spouse will happily claim their 50% stake in their soon-to-be ex’s company but have no interest in actually running the business. These situations can be resolved by offering a buyout of the spouse’s ownership interests, or the spouse selling their ownership to a third party – which can wreak havoc on the spouse who founded the company.

A Prenup Can Preclude Problems with Business Ownership

Although a business started before marriage is considered the founding spouse’s separate property, the company can quickly become commingled with the marital estate. This happens when business income is shoveled into joint bank accounts, community property is used to support the business, the other spouse is involved in the company’s management or operation, and all sorts of other ways.

A prenuptial agreement can help business owners protect their ownership of their companies. This is often achieved by explicitly excluding the company from consideration as community property for the purposes of property division. Essentially, a prenup can protect a company’s status as separate property – along with the income it generates.

Spouses on the Other End Should Worry about Debt

If you’re engaged to a business owner and presented with a prenup, you should be especially concerned about debt and other business liabilities. While business owners will be sure to protect their companies’ interests, they may not be as concerned about taking full responsibility for debt.

For this reason, it’s good to ensure that any prenup that protects business ownership also ensures that the business owner is 100% liable for the company’s debts in the event of a divorce. Otherwise, spouses can find themselves on the hook for 50% of their ex-spouse’s business debt with no equity in the company.

Prenups Aren’t Legal Guarantees

People often believe one of two things about prenuptial agreements: They are either completely ineffective or they are bullet-proof. The reality is that a prenup’s efficacy lays somewhere in between, often relying on a judge’s discretion to honor it or not.

Prenups that completely disenfranchise one spouse or that purposely put a spouse at an unfair disadvantage can be thrown out by the court. An extreme example of this might be a prenup that favor’s one spouse’s separate ownership in a business but offloads an unfair amount of liability onto the other spouse.

If a business owner wishes to solidify their ownership, they should consider options in addition to a prenup to do so. An ownership agreement or entering into a partnership with another party are two ways to add an extra layer of protection.

Do You Need Help with a Prenup?

If you are trying to protect your company or are concerned about a prenup that was presented to you, our attorneys at Claery & Hammond, LLP can provide the legal support you require. For more information about our services and how we can help, reach out to us today.

To request a free initial consultation, contact us online today.