Businesses, divorce, and what you can do to keep the business out of court

When I first began as a family law attorney, I practiced in rural Maine. Most businesses were family-owned and often run by a husband-and-wife duo. At least once per year, I was contacted by a spouse seeking a divorce whose biggest concern was how the divorce would affect the business. As we were at the point of divorce, the conversation generally concluded with me saying the business would be part of the divorce, and the other spouse is entitled to their fair share of the company. To avoid the unfortunate reality of this type of conversation, here are ways that a person can protect their business interest well before a divorce.

Prenuptial and Postnuptial agreements are contracts made by spouses and can effectively protect one’s business interests. Prenuptial agreements are negotiated before the date of marriage. One should be aware there are timing issues defined by each state that require a prenuptial to be executed by a specific date before the marriage to be considered fair. In New Hampshire, the Supreme Court has stated that it is “recommended that the contract should be presented well before the ceremony, usually thirty days.” See In re Estate of Hollett, 150 N.H. 39. Maine is a bit more lenient in that the Law Court has concluded a prenuptial agreement presented two weeks before the wedding was enforceable. In re Estate of Martin, 938 A.2d 812. A postnuptial agreement occurs after the marriage.

In both New Hampshire and Maine, the parties must fully and fairly disclose the business’s value and assets to have the prenuptial or postnuptial agreement enforced. See RSA 460:2-a and M.R.S.A. §607. If this is done and negotiated fairly, the parties may construct the agreement however they decide. They can agree that the business is separate property and not subject to division, determine a percentage of the business a spouse will receive on divorce, or determine which spouse will buy the other out in the event of a divorce.

If the parties do not have a prenuptial or post-nuptial agreement, the business will typically considered part of the marital estate. However, there are ways to retain control of the business post-divorce. The first option is understanding the structure of your business. In New Hampshire and Maine, a person can create a business as a sole proprietor, a partnership, a corporation, an S corporation, or a limited liability company (LLC). If you have chosen or are thinking about establishing your business as a sole proprietorship, make sure that you establish yourself as the sole owner. Ensure that the company’s documents state the business or shares of the business cannot be transferred because of a divorce. If you choose to establish your business as a corporation or LLC, draft articles of incorporation or by-laws indicating that the business itself or shares cannot be transferred in the event of a divorce. Careful consideration of the structure and formalities of your business and proper documentation can protect your business in the case of a divorce. The business must be valued, and the non-owner spouse will be bought out as part of the divorce process.

The next step is to keep a meticulous record of money to prevent the commingling of business and marital money. This will ensure company money pays for company expenses and prevent the commingling of assets. By taking this step, you will avoid the messiness of unraveling the commingling and prevent opening the door for your spouse to get an increased interest in your business, resulting in a greater buyout to the non-owner spouse.

The final step is understanding what to do if your spouse works for your business. It would be best to establish your spouse as an employee of the company, not an owner. Make sure that this is well-documented in the business’s files. Additionally, pay your spouse the market rate for their contributions to the business. If your spouse works as the business’s admin, pay them the market rate for an admin. If you do not, your spouse can argue for a larger interest in the company for the value they contributed to the business because they worked at a less-than-fair market rate.

It is fair to say that couples do not get married with an eye on divorce; even as a family law attorney, I wish happiness and success to married couples who work together. However, these are simple steps to protect their company well before a divorce.

Sean Leonard is a member of McLane Middleton’s Litigation Department and Family Law Practice Group. He can be reached at sean.leonard@mclane.com.

This article originally appeared on Portsmouth Herald: Businesses, divorce, and what you can do to keep the business out of court