Arizona is a community property state, which means when you get divorced, all marital assets are to be divided equally. This can include your small business, depending on when the business was started and how much of the marital property went into building the business.
Chances are, you have emotional ties to your small business, in addition to it being your livelihood. The sooner you start taking steps to protect it, the better. It doesn’t matter if you’re not married yet, or if you are happily married and have no concerns about ever getting divorced. Anyone who is currently trying to protect their business during a divorce will tell you that it’s never to early to think about how to protect it.
Here are a few suggestions on what to do from the very beginning of your company, or marriage, in order to prevent challenges that would arise in the event of a divorce.
Form an LLC before the marriage
If you own a small business and think you might want to form an LLC, do it before you get married, so that the business is entirely yours. It is harder to make a case that an LLC formed after the marriage is not community property. Also, once you get married, be sure to keep the LLC completely separate from your marital finances.
Make a prenuptial agreement
One of the strongest ways to protect your small business in a divorce is to sign a prenuptial agreement with your spouse before you get married. The agreement should establish that the business is entirely yours and will not be divided in any way in a divorce. Consult with an attorney to ensure this agreement is airtight.
Fix the oversight with a post-nuptial agreement
A post-nuptial agreement isn’t as strong as a prenuptial, but it can still get the job done. These agreements are a little more tricky, though, as they aren’t valid in all states, even though they are in Arizona. It’s best to consult with an attorney to ensure your post-nuptial agreement will be strong enough to hold up in court if there’s a divorce.
Minimize your spouse’s role in the business
Another necessity if you’re going to protect your small business in a divorce is to ensure your spouse doesn’t contribute too much. In the best case scenario, your spouse shouldn’t have any role in your business whatsoever, as they could use that to claim they were material in your business’s formation or growth. If your spouse does work for the business, have them sign a buy-sell agreement to limit their claim on the business in case of a divorce.
Keep the business’s finances separate
With many small businesses, it’s all too common for business and personal finances to blend. Keep separate accounts for the business and document everything meticulously.
Pay yourself a generous salary
Finally, it’s not enough just to keep the business’s finances separate. Be sure to pay yourself a salary, and pay yourself well, so that it doesn’t look like you were withholding part of your income (which, remember, is community property once you’re married) to benefit the business.
The more of these precautions you can take, the better it is for your business. Even if it’s too late for some of them, if you are starting to grow concerned that your marriage is headed for a divorce, it’s never too late to start doing what you can. Contact us at the Simon Law Group today to find out what steps you can take to safeguard your business from divorce.
