Married small business owners often overlook a common reason why some businesses fail: divorce. In most states, one spouse’s small business can be considered a marital asset or marital property. When a couple divorces, assets need to be divided, and that small business can be a couple’s largest asset. That’s why it’s important to make sure your business is divorce proof from the outset.

Fortunately, there are ways to protect a small business after a divorce has been filed. Nonetheless, it is a good idea to protect the business from division before divorce happens. To understand your situation, you first need to know if your business will be separate or community property.

In a community property state, there may not be much you can do to divorce proof a business started after getting married. If you started the business before getting married, then you may already have some built in protections, even in a community property state. Pre-marital assets will remain pre-marital assets so long as they are held separately.

In common law states that do not have community property laws, separate property is generally not divided. If your soon-to-be former spouse’s name is not listed as an owner for the business, it will be considered separate property and they will not be able to reach it.

How to Divorce Proof Your Business

The simplest way to divorce proof your business is through a written agreement signed by your spouse. While typically couples concerned about protecting separate property from divorce will get a pre-nuptial agreement, the same ends can be accomplished via a post-nuptial agreement. Be warned that asking your spouse to sign a post-nuptial should be done with caution as it can lead to marital problems and nights on the couch. Additionally, courts can be rather demanding in making sure fiduciary duties were not breached when negotiating and agreeing to a post-nuptial.

Another way to divorce proof a business is to transfer the business assets into a living trust. By creating a living trust, you effectively are transferring ownership of the business to a third party trustee, however you will retain control over the business, and still earn money from the business. However, upon divorce, because you do not own the business, it cannot be divided. This is something that should not be done without legal assistance.

Related Resources:

  • Find Business and Commercial Lawyers Near You (FindLaw’s Lawyer Directory)
  • Should You Let Your Employees Smoke Pot at Work? (FindLaw’s Free Enterprise)
  • Checklist for Transferring Your Business to Your Kids (FindLaw’s Free Enterprise)
  • Business Structures for Serial Entrepreneurs: Setting up Multiple Businesses (FindLaw’s Free Enterprise)

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