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What Happens To Your Family Business In A Divorce?

In New York State, if you and your spouse divorce, marital assets will be divided equitably as part of the divorce process. Under equitable division, a judge decides the fairest way to divide your assets — which may not be an equal split.

For business owners in New York, divorce can result in significant financial and business losses that can jeopardize a business’s very future. Thankfully, there are steps that business owners can take in an attempt to “divorce-proof” a business.

How New York Courts Divide Business Assets

If either spouse owns a business, an analysis will be performed to determine the value of the business and how much the other spouse contributed to the business’s growth and success. The other spouse then generally receives compensation that is relative to that contribution.

For example, a spouse who sacrificed his or her career to accommodate a spouse's demanding schedule as a business owner may be entitled to a portion of business assets as fair compensation for that sacrifice. Likewise, if any marital assets were invested into a business, your spouse may have a claim to part of the business—even if he or she wasn’t active in running it. This means that even if you started the business alone, your spouse could claim a substantial portion of your business’s assets and value in a divorce.

Protecting Your Stake In The Business

In order to shield your business from the damaging effects of divorce, it’s wise to be proactive and take steps to reduce your spouse’s contribution and exclude the business from your marital property. There are several ways you could do this, including:

  • Sign a prenup or postnup. A prenuptial agreement is one of the most effective ways to exclude your business from being subject to the asset division process, but you need to plan well in advance—before you get married. Alternatively, you could sign a postnuptial agreement after you marry. However, postnups provide weaker protection and may not hold up in court.
  • Run your business as independently as possible. Since business assets are subject to equitable distribution, you want to be sure your spouse has little reason to claim those assets. Keep clear records that differentiate business finances from family finances. Drawing a definitive line between your business and your marriage can minimize the share lost to your spouse.
  • Put your business in a trust. By placing your business in a trust, you preserve the business for your children and protect it not only from your own potential divorce, but their potential divorces as well. This needs to be done well before a divorce is even considered, however, or it could be viewed as a fraudulent transfer.
  • Give yourself a competitive salary. If rather than taking a higher salary you reinvest that money back into the business, your spouse may lay claim to that reinvestment. By paying yourself a competitive salary, you reduce that risk and may reduce the claim they have to your business assets.

These types of business protection tactics are especially useful if you choose to litigate your divorce. However, many times, mediation or negotiating with a soon-to-be ex is the best solution to preserving the life of your business.

Regardless of the path you choose, you need to be proactive in planning for the future of your family business. The last thing you want is a potential divorce ruining the legacy you worked so hard to establish for your family’s future.

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