Owning a Business During a Divorce

Plan from the beginning to keep control of your business. If it’s either a partnership or small corporation, you and the other achievers who created the business can accomplish this with a simple written agreement. Your business attorney should prepare this buy-sell agreement to be signed by all principals and their spouses. When someone leaves the firm or there is a divorce, the shares or partnership interest of the one no longer involved in the business must be sold back to the business according to a formula, such as book value. Then, enforce the agreement whenever an owner leaves or there is a divorce.

The court will uphold a buy-sell agreement designed to keep control of the company in the hands of those actively involved in the business. A contrived agreement, never before enforced and created solely to place a low value on the business interest belonging to an ex-spouse, is not going to be honored.

Mark, my client, was the creative force behind a successful business. His wife Tara argued the stock they owned in the company was or would be worth many millions. Mark and the other key employees who held all the shares didn’t look forward to having to deal with Tara as a continuing shareholder. They didn’t have to. They had a well-drafted buy-sell agreement signed by Tara requiring her to sell her one-half of the community shares back to the company at book value if there was a divorce. Fortunately, this agreement was enforced through court action two years earlier. Tara was limited to the book value of the stock.

You may be able to defer the receipt of earned income to avoid raising your ability to pay support, similar to timing payments or receipts for tax purposes. When you eventually take this money, your ex-spouse may find out and you may have to pay more support. Why not let the status quo for your income remain at a lower level, with support set more favorably to you, and take your chances on the future?

Get specific legal advice first because you may be skating on thin ice. As an example, it’s one thing to turn down a promotion and argue marital strife made it inopportune to relocate or take on additional burdens at the office, but quite another to put a document in your file to hold your raise and let it accumulate. If you are blatantly placing income beyond the court’s reach, you may end up paying your spouse’s attorney’s fees as well as the increased support.

When preparing financial statements, remember that they may be used against you. The classic case involves a business owner listing inventory, equipment and receivables on a loan application at inflated values in order to get the loan. Later in a divorce proceeding, the business owner is crying about the terrible condition of the business and placing a low value on the assets. Then the owner is confronted by his or her own statement, usually certified, sworn or given under penalty of perjury, stating much higher values for the very same assets; now, he or she starts shedding real tears. The court now has a basis on which to disregard his or her testimony in the divorce proceeding on the business valuation, and the opposing attorney has a very good argument that all the owner’s other testimony is suspect!

Your business will be valued in the divorce proceeding. Do what you can to defer plans that would increase its community property value. Work with your accountant as you would in planning tax strategies. Put off that expansion into a favorable new market if you want to keep it all for yourself.