For some, finding the perfect partner in life means happiness, fulfillment and … transferring assets. Some entrepreneurs wishing to insulate personal assets from liability for business debts place ownership of all or virtually all assets in the name of their fiancée or spouse. While this plan may work in some cases, it may actually complicate things in the event of a divorce or other unexpected circumstances. There are a number of alternatives for entrepreneurs to protect their investments that present a lower risk for an unfair property distribution or forced sale of a business.
Many savvy entrepreneurs already know that creating a separate LLC or corporation to manage business transactions may shield their personal assets from business liabilities. Except in the case of personal guarantees or other assumption of personal risk by the entrepreneur, fraud, or mismanagement of the business, the business should function to limit the availability of assets to pay business debts to business assets only.
Setting up a business can resolve the immediate concerns of entrepreneurs. At the outset of a business venture or marriage, it can also be beneficial to prepare for the orderly resolution of potential future concerns, such as a divorce or the transfer of business ownership interests.
While some spurn the idea of prenuptial agreements, they no more doom a marriage to failure than having insurance guarantees an accident or loss. A prenup may be viewed simply as an agreed-upon Plan B — a road-map for the unlikely. A prenuptial agreement can fairly predetermine property division in the event of divorce, including ownership of:
- The home
- Vacation properties
- Any vehicles or boats
- Any business interests
Especially in the case of a professional or licensed business, the entrepreneur spouse may want to protect his or her investment. A prenuptial agreement can specify that the business owning spouse will retain the full ownership interest after divorce. Without an enforceable prenup, it is possible that the business may be viewed as a marital asset, and a court may require a forced sale in order to divide the value of the business between the two spouses.
Another misconception is that prenuptial agreements are only for the wealthy. Couples with many levels of property ownership can benefit from this premarital agreement by helping to prevent the assets that are owned at divorce from being usurped by legal fees. Divorcing spouses may save money in a divorce by avoiding courtroom battles over personal property and pets.
If both spouses are contributing or have an interest in the business, they may want to consider a buy-sell agreement. A buy-sell agreement sets forth what should happen if one spouse wants out of the business. It may specify that the spouse wishing to leave the business has to sell his or her interest back to the company or to someone who already has an ownership interest, preventing a stranger to the business from acquiring an ownership interest.
Couples who are already married also have options, including creating separate property agreements. A separate property agreement identifies which spouse owns what property. These agreements are not limited to property that the spouses individually brought into the marriage. Even property that would otherwise belong to both spouses, including property acquired during the marriage, can be included in the separate property agreement. Since the spouses have agreed that certain assets are not jointly owned, assets owned by the non-entrepreneur should be shielded from liability if the entrepreneur spouse is sued or otherwise assumes liability for business debts.
As opposed to transferring all property into the name of the non-entrepreneur spouse, this is a more mutual arrangement. Additionally, if the non-entrepreneur spouse becomes ill, there is greater protection against all of the couple’s assets being made available to pay hospital or care bills.
Working With an Attorney
There are many asset protection options available for entrepreneur spouses, and a consultation with a family law attorney experienced in business valuation and division matters can provide valuable information. Spouses can learn how to protect their business interests from creditors and also provide for an advantageous yet fair outcome in the event of divorce.