Last week my family law background and small business client crossed paths. A possible client came to me because one of her business partners is going through a divorce. There are four partners in the business. All of the partners are concerned about what effect the divorce could have on their business. (Their business was started during the partner’s marriage and will likely be considered marital property by the court).
Unfortunately, the partners never got around to doing their corporate paperwork when they started their business. The law provides them with very little protection from the partner’s soon to be ex.
There’s no “insurance” you can buy for the business to protect against a divorce. But using your operating agreement, you can at least add some protections for the business.
Protection in Your Operating Agreement
Your operating agreement should include a provision that allows the business to buy back an owner’s interest. This can be triggered by a variety of events, the divorce of an owner can be one of those events. In addition, you can place restrictions on who can own the business. For example, restrictions, when an event happens, can include
- Restricting who can own the company to a specified group of people;
- Automatically converting that owner’s interest into a non-voting interest; and
- Restricting the transfer of ownership to third parties without the prior written consent of the other owners.
If you are truly concerned about the effect of a divorce on the company, you can include a prohibition against an ex-spouse receiving any interest in the business. In that case, if a court awards the ex-spouse an interest, it is only as an assignee, not an owner.
There are a variety of issues that arise when a business owner goes through a divorce. Especially where there are multiple owners of a business, many different outcomes can arise.
If you or your business partners are concerned about the effects a divorce could have on your business, give me a call and we can sit down to discuss the process and what documents would be best tailored for your company – (877) AMAYERS.