As a business owner who is divorcing, you might be worried whether your spouse can claim part ownership and whether you will have to divide your business. Protecting what you have worked so hard to build is likely to be one of your biggest priorities in navigating the end of your marriage.
When you are going through divorce—or even just planning for the future—it’s essential to understand the legal strategies available to protect your business interests.
Strategies for Protecting Business Interests in Divorce
Prenuptial and Postnuptial Agreements
One of the most effective ways for business owners to protect their companies in divorce is with a valid prenuptial agreement or postnuptial agreement, also called a mid-marriage agreement. These legal contracts can define in advance whether a business is considered separate or marital property and what portion—if any—the other spouse would be entitled to in the event of divorce.
Under New Jersey law, prenups and postnuptial agreements are enforceable as long as:
- Both parties entered the agreement voluntarily
- There was full disclosure of all financial assets and liabilities
- Each party had the opportunity to consult with their own legal counsel
- The agreement was fair at the time it was signed.
A well-crafted prenup or postnuptial contract can identify a business as the separate property of one spouse, exclude business appreciation from marital assets, or set forth a buyout formula. This proactive step provides clarity and protection during what can otherwise become a lengthy and costly property division process. If you signed such an agreement and are divorcing, provide a copy to your attorney for review of its legal enforceability.
Business and Household Finances
To help protect your business do not blur the lines between business and household finances. Here are some do’s and don’ts toward that end:
- Keep separate bank accounts and credit cards for business activities
- Avoid using business accounts for household expenses
- Maintain detailed and accurate financial records for your business and household
- Pay yourself a fair market salary to avoid claims that excess profits belong to the marital estate.
These steps can help establish that the business is a separate asset.
Business Organizational Documents
Internal documents like operating agreements, partnership agreements, and shareholder agreements can influence what happens in divorce.
These documents may:
- Restrict the transfer or sale of business shares to third parties (including a former spouse)
- Require that business interests be sold back to the company or other owners upon divorce
- Establish valuation methods for ownership stakes
Depending upon how your business is structured, what agreements you have, and what they say, these contracts may protect your interests and limit disruption to the business.
Your organizational documents should also state when you started your business, which if prior to marriage will probably prove that at least part of your business is separate property.
Asset Trading
New Jersey uses equitable distribution criteria as described in N.J.S.A. 2A:34-23.1 to divide marital property in divorce. If you wish to retain full ownership of your business and your spouse is entitled to a portion of it, you could offer them a greater share of other assets in exchange for their interest in your business.
For example, you might negotiate that your spouse gets in exchange:
- A larger share of retirement accounts
- Investment or savings accounts
- The marital home
Another approach is to buy out your spouse with your separate assets or arrange a structured payment plan in which you buy out their interests over time.
When a Spouse May Be Entitled to a Portion of the Business
Businesses acquired or developed during marriage are generally considered marital property and subject to equitable distribution. Even if the business was started before the marriage, the increase in value of the business during the marriage may be considered marital property—especially if the non-owner spouse contributed to its growth, either directly or indirectly.
Examples of such contributions include if your spouse:
- Worked in the business (even without formal compensation)
- Took care of the home and children, enabling you to focus on growing the business
- Invested funds into the business
- Provided professional services or expertise.
In these situations, the court may award your spouse a percentage of the business’s value or its appreciation over the course of your marriage.
Determining What a Business is Worth
Before a business can be divided, or other assets granted to your spouse in place of interest in the business, its value must be determined. This is often one of the most complex and contested aspects of divorce involving a business.
There are three primary methods of business valuation:
- Asset-based approach—Calculates value based on the company’s assets minus its liabilities
- Income approach—Uses its future earnings potential
- Market approach—Compares the business to similar businesses that have recently been sold.
Which approach is used depends on the specific circumstances of the business and divorce. The court may appoint a neutral business valuation expert, or each spouse may hire their own expert, resulting in competing valuations. Accurate financial records, tax returns, and cash flow documentation are essential to proper valuation. The valuation date may also affect the outcome, as courts can use either the date you and your spouse separated or the trial date depending on the circumstances.
Reach Out to Our Experienced New Jersey Law Firm for Help
If you are beginning the divorce process—or want to protect your business in case of future divorce—consulting with an experienced attorney is crucial. New Jersey’s equitable distribution laws allow for flexibility, and with proper planning, it’s possible to preserve your business while fulfilling your obligations in a fair and legally sound way.
We will review your situation, both business and personal, and help you develop a strategy for preventing your spouse from retaining an interest in your company post-divorce.
Contact [MFR] Men’s & Fathers’ Rights Divorce Lawyers to schedule a confidential consultation by calling (201) 880-9770 today. Our lawyers have decades of combined experience successfully advocating for our clients’ property rights and interests.
