Four Actions to Take Now to Protect Your Family Business in Divorce

If you own a family business with other family members, this article gives you 4 ways to protect the family business if one family member-owner were to get a divorce.

In New Jersey, the spouse of a family business owner could acquire ownership rights in the business simply by being married.  Therefore, the time to protect your family business is now.  Because once the divorce papers are filed, it could be too late, risking the profitability and future successful operation of the business.  Below are 4 important actions to take now to protect the family business:

1.        Put it in writing.

The shareholders’ or similar family business agreement should clearly set forth each family member’s specific or percentage share in the business.

Significantly, your family business agreements should also include a provision that addresses the interest, if any, those non-owner spouses have in the business and what happens to stock or ownership interests in the event of divorce.

Ideally, family business agreements would require all owners to obtain their non-owner spouses’ written agreement to be bound by such provisions.  These are often called Agreements to be Bound.

2.        Put it in writing again.

Where an Agreement to be Bound is not feasible or insufficient, consider a prenuptial agreement that provides for the waiver by the spouse of an interest in the family business.

Alternatively, consult with a reputable business and estate planning lawyer to consider whether an estate planning device, such as a trust, would be more effective.

It’s important that your business lawyer works with your divorce and family lawyer so that all legal requirements are met and to ensure your family business is sufficiently protected.

 3.        Limit the non-owner spouse’s role.

It’s generally best for non-owner spouses not to be involved in the operation of the family business.  This can help defeat the spouse’s claim to have contributed to the profits of the business and receive a greater share in the business.

4.        Keep it confidential.

Most divorces in New Jersey are settled by way of a divorce agreement (typically referred to as a “Marital Settlement Agreement”).  Significantly, Marital Settlement Agreements are considered public records.

Therefore, to the extent the Marital Settlement Agreement identifies the value of the family business, names of officers, and additional confidential business details, a confidentiality provision should be included.

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