79% of American businesses are non-employee businesses, with no staff other than the owner. This 79% generates billions of dollars collectively for our economy. If you are in this rather large segment of the economy and you are married (or might get married in the future), you would be well advised to consider how to protect your business in the event of your marriage going south. Everyone plans on their marriage lasting forever but the reality is that about half of marriages will end in divorce, so it pays to plan ahead.
Life changes all the time, from divorce to unexpected deaths. Structuring your business to protect your income from the highs and lows of your personal life is important to maintain your economic stability in difficult times.
LLC’s and Corporations Can Help Shield a Business From Divorce
One way to structure the business to protect the assets is to create a limited liability company. A limited liability company is registered with the state. It can have one member or multiple members. The business is run under an “operating agreement” which describes how decisions are made for the business. While the owner may be the sole member of the LLC, the assets — such as real estate and bank accounts — could be titled in the LLC, potentially shielding them from consideration as personal assets in a divorce proceeding, particularly if the LLC was created prior to the marriage.
A related way to protect business assets is to create a corporation, such as a c-corporation or an s-corporation. A corporation is also a separate legal entity from you as an individual. An accountant could advise you on which form of corporation would best protect your assets and benefit you in terms of taxes. The corporation, like the LLC, could hold the business assets and protect them in the event of divorce, ideally being created prior to marriage. A corporation is registered with the state and has a separate tax ID number.
Set Up a Trust as Owner of the Business
A third legal structure that could protect assets in the event of divorce is a trust. A trust is a separate legal entity from the settlor and trusts can own real estate and have bank accounts. A business owner could legally transfer the business assets to a trust to protect the business. Trusts do not have to be registered as a business with the state. Creating a trust requires executing the trust documents properly. Trusts also have their own federal identification number, further demonstrating their separation from the owner of the business.
Execute a Premarital Agreement with Your Fiancee
If the business is in existence prior to the marriage, the business owner may consider asking the prospective spouse to sign a prenuptial agreement. A prenuptial agreement can simply state that the business belongs only to the spouse that founded the business, or it can go on to specifically describe the property owned by each spouse prior to the marriage and also delineate the anticipated distribution of assets in the event of divorce. While some people may shy away from the concept of a prenuptial agreement, keep in mind that this is a sound legal method when one party owns and operates a viable business prior to the marriage.
Small businesses employ more than 59 million people in the United States. Protecting a business from divorce is important not just for the individuals involved, but also for our economy as a whole. It may require a bit of planning and legal advice. However, with proper preparation a business can easily be protected under the law.
Rowena Kang is a writer and the Outreach Director for the Morgan Law Firm, a firm that represents clients going through a divorce in Houston, Texas. See additional articles on the firm’s Houston Divorce Blog.
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