Business owners – Why you should sign a prenup 

Jan 17, 2021 | Finances, Prenuptial Agreements

So you’ve raised your capital, you’ve sweated out a business plan, and your logo looks damn good on your website. You’ve created a roadmap for your vision and now you’re the proud owner of a business. Congrats on this accomplishment and good for you for bringing your ideas to fruition! To add to this overwhelmingly awesome venture, you’ve decided to get married and share this exciting journey with the love of your life (and kudos to you for having the time to get a few dates in while launching a business). You’re no stranger to hard work, and you’re definitely not one to be suckered into anything. So here you are, doing the legwork for something in your personal life and creating your marriage business plan, and you’re wondering: How do I protect my business in case this relationship just doesn’t pay off? What do I need to know to avoid putting my business at risk? Is there anything I can do to avoid bringing my business into my marriage? Just like your business partnerships, marriage is a personal business relationship that has the same operating standards as starting your business. It’s just packaged a little differently – you have a huge (or in covid times, not so huge)  ceremony with your friends and family (instead of colleagues), you guys hang out 24/7 (instead of via zoom from 6:00am-8:00pm plus virtual happy hours), and you get to share a bed (TMI?) A prenup (prenuptial agreement) will protect your business financially, and keep your entity separate (only if you want to). Let’s get into the logistics so you can start mapping out the [insert your last name] business plan and get your life started.

Your spouse may be entitled to equity in your business 

We don’t just mean the social media mentions, the bragging rights, and the “gift baskets from vendors” type appreciation. We mean cold, hard equity.. The old saying “what’s yours is mine now, sweetheart” truly does reside even outside of your home. Once hitched, without a prenup, a spouse may be entitled to a significant part  of your equity in the business  value purely because you’re married. Why? For example, if you have a start-up that distributes additional shares to you, one of the founders while you are married, those shares/equity may be deemed marital property. Even more so, if you started a new venture while married, the likelihood of those shares being considered marital property may increase. Here’s an example: Warning: word problem loading… Let’s say you start your business or take equity in a startup 5 years before you get married.  At the time of your marriage, your equity or shares in the business are worth $1 million, but over the course of your marriage that interest appreciates to $2 million. Could your spouse be entitled to that $1 million appreciation? Quite possibly! (Thank you, captain obvious). The devil is in the details, as they say. These details all depend on your state’s laws, your business, and a handful of fine print characters, but overall, yes. Your equity as an owner in certain instances, and the appreciation of your equity in this business could be  now considered marital property UNLESS you specify that this should not be the case…. by way of a prenup. This brings us to a baseline worth mentioning when it comes to prenups: in essence, prenups map out what is considered shared marital property, aka community property in some states, and what is considered separate property (this is mine and that is yours). This might not be new news to you, but thanks for riding with us through this information with a little bit of training wheels (so we keep this in mind for the remainder of this article). If your vision is to keep your business separate from your spouse, then hi! 👋 We are HelloPrenup. Get started here to make sure your business interests, and perhaps even the income derived from that/those business(es) is considered “separate property” and treated as such. If you’re totally cool with your spouse being entitled to some of that equity or income,  then kudos to you two. It has become commonplace for partnerships and operating agreements to require that unmarried shareholders get a prenup before getting married, so don’t worry- you are in good company. You do not need to list your business as  separate property  in your prenup and you can take your chances- laws on this subject vary from state to state.. , don’t leave the fate of your business interests  to chance without a prenup. It’s expensive to go through a divorce financially and emotionally, so you might as well remove one giant piece of negotiation from the table now.

Debt could be  considered “marital property” unless specified otherwise

Perhaps you’re getting married while you’re still in the beta phase of your company. Or, at the very least, still in the conceptual phase, and your company has/will have some debt on the books. As common as this is while starting a business, it’s less common to know that any debt you incur while trying to get this business off the ground is now potentially your spouse’s debt too. Even if he/she is not a business owner. Here’s why. Marriage means you and your partner are “one” in the eyes of the law. This not only accounts for assets (like bank accounts, cars, houses, etc.) it also accounts for things you owe (like debt). Getting married means sharing everything equally(ish) and that even includes debt.  If this doesn’t sound like it jives for you and your partner, a prenup is a great way to clarify that debt is separate property and will be treated as such. Let’s flip the equation for a moment. What if your partner decides to start the next ______ company and put all of their savings, plus all of their lines of credit on the table in an effort to get this business going? Do you want to share that debt with them? Do you want to share all of your hard earned savings when they gambled theirs away if you both decide to call it quits down the line? Oftentimes, debt when beginning a small business is also personal debt. Frame out who owes what in the event of divorce so you don’t have to lose sleep over the fact that you could potentially lose a good chunk of your wealth due to your partner’s business decisions

Your employees can be affected by your marriage/divorce

Let’s say that you own a small business or closely held corporation, and you and your spouse divorce. The judge rules that your spouse is awarded a portion of the business equity for whatever reasons, and now your spouse is making a bunch of financial decisions that you would not, and basically running a muck making business decisions that you never would. Now – State laws vary, and there are many factors that will be taken into account during a divorce settlement that may lead you to this point. Alas, it happens all the time. This can directly or indirectly affect your employees as they rely on the health of your business to be able to contribute to their own lives.  In that vein, , if your spouse becomes a soon to be ex-spouse, and the company is considered “marital/community property” then your spouse could potentially walk away with a large chunk  of the value of the equity, or equity appreciation and cut a fraction of your staff overnight. This sounds dramatic, we know, but it happens. Too often. We’re just here to give you the facts. So when deciding your marital business plan with your partner (aka your prenup), ask the question and decide for yourselves if sharing this business is worth the risk or not. Or, you can create a prenup and clearly map out whether the business should be considered separate property or marital property,  so you can keep your marriage separate from your employee’s lives and the health of your company and not have to worry about how it might affect dedicated employees.

Your business partner might be affected by your marriage (or vice versa)

If you share rights to your business with other(s) then you may be subjecting risk to your business by allowing it to be vulnerable to financial shifts in your marriage or your partner’s marriage. In fact, many operating agreements now require all partners to the business to obtain a prenuptial agreement should they marry in the future.  As stated above on business equity and debt and how it can affect employees of the business, the same applies for your business partner. If your marriage/divorce puts your business in a place that is subject to vulnerability, you and your business partner (as well as your fiancé) could very well be subject to a nasty fluctuation in your company’s value and set off a ripple effect within your business that doesn’t have to occur altogether. Just imagine if your business partner went through a nasty divorce and some of your hard earned money was effectively allocated to their soon to be ex-spouse via the business.  That could potentially happen if you are not cautious and use a prenuptial agreement to delineate what is separate property (ahem, your business) and not marital property.  So stated before, it’s also extremely common these days for business owners to agree prior to entering the business that prenups are mandatory so there is no ambiguity in the future of the company. As a business owner, you already know that there is so much unknown about the future of your business and its overall health. Why risk something that could potentially set you and your business back when it could be avoided and managed with a prenup?

Clauses to include in your prenup

These are some important clauses to be included in your prenup, if you are a business owner. These clauses help with those “what if” situations that clearly define what will happen in the event of “x”. At HelloPrenup, that’s our bread and butter. We provide you with ample options  to help customize your prenup so all of your bases are covered. As a business owner, there are a few clauses that are common amongst our business owners. These include: 👉 Social image clause – prevents disparagement against you on social media, public facing, etc. 👉 Confidentiality clause – Ensuring that if your spouse is privy to confidential information of the business, that they do not disseminate this information. 👉 Non-Compete clause – Ensuring that if your spouse were to work for your business at some point, or be privy to confidential business information, that they do not start their own competing entity.  👉 Listing the Business, and all income derived from that business as Separate Property – This is helpful in ensuring that your business or interest in a business is not considered marital property. By listing it as separate property, you are making clear your intention for the business interest to remain yours alone.  By adding these useful clauses/options to your HelloPrenup, you will be adding a layer of protection to make sure that no matter what happens in your marriage, your business stands a greater chance at protection. 

Anything that is on your mind

There’s no shame in wanting to protect your business from any unknowns that could happen in your marriage. In fact, many business owners adopt HelloPrenups as their preferred way to draft and negotiate their prenuptial agreement, because they are able to control the process, negotiate with their fiancé directly, and add clauses that they feel can ensure their business is protected in the event of a divorce.  If you have something that you want documented, get a prenup. If you want to make something very clear between you and your fiancé in regards to your business, finances, or ya know, anything at all, get a prenup.  Setting out a business plan for the rest of your life is arguably more important than writing out the business plan for your company. After all, when you’re happy and confident in your marriage, everything else just seems to fall into place. HelloPrenup is specifically designed to help you get peace of mind when you need it most and protect yourself in every way possible, even with your growing business. Congrats on this new venture between you and your fiancé and your business and we can’t wait to see how it all works out.   Need more information? Check out our FAQs for more answered questions or send us a note at Hello@HelloPrenup.com XO, HP 🥂 This blog is for informational purposes only. HelloPrenup, LLC (“HelloPrenup”) makes no representations as to the accuracy or completeness of any information on this site. HelloPrenup will not be liable for any errors or omissions in this information nor for the availability of this information. These terms and conditions of use are subject to change at any time and without notice. HelloPrenup provides a platform for legal self-help. The information provided by HelloPrenup along with the content on our website related to legal matters (“Information”) is provided for your private use and does not constitute legal advice. We do not review any information you provide us for legal accuracy or sufficiency, draw legal conclusions, provide opinions about your selection of forms, or apply the law to the facts of your situation. If you need legal advice for a specific problem, you should consult with a licensed attorney. Neither HelloPrenup nor any information provided by Hello Prenup is a substitute for legal advice from a qualified attorney licensed to practice in an appropriate jurisdiction.

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