Divorce-Proof Your Business

It’s a sorry fact that about half of all marriages end in divorce. That fact takes on additional importance for the owners and operators of commercial and residential snow and ice removal businesses whether or not they are in business with their spouses.

Married owners of snow and ice removal businesses often overlook a common reason many businesses fail: divorce. After all, in most states, one spouse’s business can be considered a marital asset or marital property.

When a couple divorces, assets need to be divided and an “ex” could wind up as a business partner or a fight could ensue to keep the operation from being sold to raise cash. Once divorce proceedings begin, a business owner or operator most likely won’t be able to implement the legal maneuvers that, if undertaken in happier times, could keep the business from being sold or landing in the soon-to-be ex’s possession.

IN THE BEGINNING

Whether the snow and ice management business will be separate or community property is the basis for divorce proofing the operation. In a community property state, there may not be much that can be done to divorce proof a business started after getting married.

If the business was started prior to the marriage, there may be some built-in protections -– even in community property states. Generally, pre-marital assets will remain pre-marital assets so long as they are held separately.

Establishing any business as a sole proprietorship leaves it vulnerable to future problems. Even with one spouse staying home or working elsewhere, most ex-spouses are entitled to a share of the business -– often as much as half.

In common law states that do not have community property laws, separate property is generally not divided. In other words, if the soon-to-be ex’s name is not listed as an owner of the business, it will be considered separate property and usually untouchable.

STRATEGY BEFORE AND DURING MARRIAGE

The simplest way to divorce-proof the business is through a written agreement signed by the spouse. One answer: a prenuptial agreement.

In a prenuptial agreement, couples may decide in advance what portion of their business is considered separate property and what is to be considered as marital property in the event of a divorce. For a jointly owned snow removal or ice management business, a prenuptial agreement can establish from the outset a 50-50 distribution of business interest to each spouse.

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While a prenuptial agreement is more common with couples protecting separate property in the event of a divorce, the same result can be accomplished with a post-nuptial agreement. Like a prenuptial agreement, a postnuptial agreement can help couples establish which portion of the business each owns if they become business partners after getting married and don’t have a prenuptial agreement.

Although often viewed skeptically, if a postnuptial agreement is done long before the marriage disintegrates -– ideally more than seven years before a breakup -– it might be useful in defining the business as separate property.

If the thought of a pre- or postnuptial agreement makes either party uncomfortable, an agreement can be drawn up and signed that will provide the spouse with some financial protection in exchange for leaving control of the business as it stands. Such an agreement can require selling the business upon divorce at a value to be determined by a third party. Another option involves establishing a trust.

A TRUST IN DIVORCE

A Domestic Asset Protection Trust or DAPT, doesn’t require a spouse’s approval according to the American Bar Association. A DAPT transfers ownership of the business into a trust. In other words, the trust would own the business and keep it from being counted as a marital asset. The move also protects the value of the operation’s growth.

Depending on where a trust is created, it can also protect the business’s assets. There are trusts that protect assets from creditors in a divorce, including future spouses. What’s more, a snow removal business owner or operator could name him- or herself as a potential beneficiary. With every state having different rules, and trusts often feasible for S corporations, professional advice is especially important.

DIVORCE PROOFING WITH PARTNERSHIPS AND LLCs

Family Limited Partnerships (FLPs), Limited Liability Companies (LLCs) and incorporated businesses are useful in controlling certain assets in the event of a divorce. Creating a separate entity and transferring assets during the marriage and assuming control of the entity as the FLPs sole general partner, the LLCs sole manager or the incorporated business’s sole officer can ensure control is retained even when ownership is divided equally.

Divorce courts generally don’t dissolve FLPs, LLCs or corporations, particularly where third parties such as children have an ownership interest. Generally, the courts adjust the ownership interests so each ex-spouse winds up with an equal percentage.

However, if the entity was controlled by one party prior to the marriage, that party should continue in control despite losing a considerable share of the entity’s equity.

AGREEING TO DISAGREE

Even with a pre- or postnuptial agreement, it’s important to have some type of operating agreement, partnership or shareholder agreement that includes provisions protecting the interests of other owners in the event one owner gets divorced.

A basic buy-sell agreement enables the parties to agree to a formula early on for establishing the value of their business at any point in the future in the event of a divorce, death, or disability. A buy-sell agreement also protects any partners from the spouse of a divorcing partner. Otherwise, the courts could allow the spouse to become a partner against their will, potentially dooming the snow removal business.

DIVOCE PROOFING ESSENTIALS

Whether a spouse works for the business, has nothing to do with it or if the owner marries a key employee of the business, some steps are essential in divorce-proofing a snow removal business. Among the strategies that should be considered if a divorce is threatened or already underway and the business considered to be a joint asset are:

• Fire your spouse. If a spouse is actively involved in the business, ease him or her out as soon as possible. The bigger the ex’s role and the longer he or she worked in the business could support a claim the spouse helped build the business and should profit from its growth
• Maintain good records and keep the family’s finances separate from the business. Keeping up-to-date and accurate financial records separate makes it easier to track cashflow and ease doubts when determining matrimonial and non-matrimonial assets.
• Pay yourself a good salary. Failing to pay yourself a competitive salary and, instead, reinvesting everything back into the business leads to claims of more money or a larger percentage of the business.
• Have insurance. A whole-life insurance policy that builds cash value can be liquidated to provide the funds needed to buy out a spouse’s share of the business if necessary
• Get a fair valuation. Use of a neutral, court-appointed appraiser reviewed by another valuation professional minimizes disagreements
• Raise capital by selling an interest in the snow removal or ice management operation. Selling a minority stake through an employee stock ownership plan or finding an investor willing to pay cash for part ownership are feasible strategies
• Sacrifice other assets. In a divorce settlement, a couple’s total assets are added up before being divided. Retaining 100% ownership of the business can often be accomplished by forfeiting other assets such as retirement accounts, the family home, vehicles, or collectibles
Arranging to make any payments over time. It is all-too common to pay an ex for a share in the business gradually with the regular payments coming from the operation’s cash flow or a bank loan

For those marriages is in trouble, strategies are important. Once the proceedings begin, business owners will be unable to implement other legal maneuvers that, if accomplished in happier times could keep the business from landing in a soon-to-be ex’s possession.