Co-owning a business with your spouse can be a wonderful experience, but it is one that is fraught with peril if your marriage ends in divorce. The joy (and profit) you take from a joint venture with your spouse can quickly evaporate post-divorce if you and your now ex-spouse are unable to adjust to your changing personal, financial and business relationship.
Setting aside the obvious issues, such as how are you going to handle working in close proximity to your ex-spouse, the focus in pre-divorce business planning should revolve around two major questions. First, if ownership of the business is split between spouses, is there a mechanism in place for making decisions when the owners and now ex-spouses no longer agree? For example, if you and your ex-spouse each own 50 percent of the company, who will make the crucial decisions that will determine the company’s future?
Second, is there a mechanism for changing (or preventing further change to) the post-divorce ownership structure? Assume one person is actively involved in running the company and the ex-spouse is content to merely sit back and collect his or her portion of the profits. Alternatively, is there anything to prevent an owner from selling or gifting his or her shares to an unwanted (by the other owners) third-party, such as a new romantic partner? If working with your ex sounds bad, imagine watching your ex’s new partner get a share of the profits without having to do any work.
Thankfully, you can avoid these problems by executing a shareholders’ agreement. Shareholders’ agreements (or operating agreements if you own an LLC) often contain one or more of the following provisions that are vital to diffusing the post-divorce ownership quagmire. First, the agreement, in conjunction with the company by-laws, will spell out the manner in which decisions are made within the company and also between shareholders (i.e., majority rules, unanimous consent, etc.). Second, the agreement may place restrictions on an owner’s ability to sell or transfer his or her shares to a third-party by giving other owners a right of first refusal. Third, the agreement may specify that if an owner divorces and a portion of his or her shares in the company is distributed to a now ex-spouse who was not involved (or was less involved) in the business, the ex-spouse must immediately offer the shares back for sale to the company and or the other shareholders. Similarly, the agreement may contain a “shotgun” provision whereby one shareholder (“Shareholder A”) can offer to purchase all of the shares owned by another shareholder (“Shareholder B”). Shareholder B must then either sell all of his or her shares or purchase all of Shareholder A’s shares under the same terms and conditions. Think of the shotgun clause as the drafting equivalent of a “loser leaves town” match whereby one shareholder or the other is guaranteed to be out of the business at the end of the day.
Two additional documents can further reduce post-divorce confusion. First, a prenuptial or post-nuptial agreement can specify how company stock will be handled or divided in a divorce. This is particularly important when one spouse started or inherited the company and wants to ensure that ownership remains firmly on his or her side of the post-divorce line. Second, if ownership is split between ex-spouses, a written (employment) agreement clearly defining roles within the company can be tremendously helpful. Put simply, the post-divorce work environment runs far more smoothly when everyone involved knows their roles, rights and responsibilities.
Finally, remember that it is always easier to hop into bed or business with someone than it is to get out. By planning ahead and acting while everyone is still on speaking terms, you will greatly reduce the likelihood that a divorce, either your own or that of a co-owner, will derail your business by hijacking the decision-making and profit and labor sharing process. Do not wait until you are divorced to figure this out. It will only get more complicated and expensive.
Adam Roark is the owner of the Roark Law Firm, P.A., a boutique law firm specializing in estate planning, probate and business development. Adam is a graduate of Davidson College and Wake Forest University Law School and also holds an LL.M. in Taxation from the University of Florida. Recently named one of Gainesville’s top 40 under 40, Adam is a frequent speaker and presenter around town. For more information about upcoming talks or to schedule a free consultation, please visit www.adamroarklaw.com or www.facebook.com/Roarklaw.