By Gianna Huesch
There are many reasons why it is beneficial to enter into a Binding Financial Agreement (BFA, aka “pre-nup”) with your significant other, but it’s especially important if you are a business owner, because unfortunately, the fact is that divorce can put your business at risk.
An article at Business.com takes a look at some of the reasons why it’s so important for business owners to enter into a BFA with their spouses, and suggests some protective provisions you might wish to consider if this situation applies to you.
Pre-nups are basically contracts that classify premarital assets as either separate or marital. As explained in the story, without a BFA, your spouse may end up entitled to half (or more) of any appreciation in value that your company has experienced during your marriage.
Further, you may end up liable for debt, since after marriage, debt is shared. Without a pre-nup, “creditors can still potentially come after your business after the divorce.”
In order to structure a pre-nup that protects your business, you will need to discuss with you partner which assets should be defined as separate or and which should be defined as marital property. Agreeing which assets will maintain their pre-marital character is important—and characterising your business as a separate property will help prevent your spouse from being awarded 50% of your company’s appreciated value.
To limit your debt liability, you can make sure you add a provision that states that you and your partner agree not to assume each other’s debts throughout the marriage, and you can clarify how any debt incurred by you as a couple will be divided.
Of critical importance is to make sure your pre-nup is actually enforceable. Your lawyer will explain the ways in which a pre-nup needs to be created in order to comply with regulations and ensure it is not simply rendered void and therefore useless. This includes, for example, ensuring both members of the couple obtain independent legal advice (you can’t both see the same lawyer). Pre-nups may also be limited in certain ways, depending on issues such as whether your spouse contributed time or money to the business while you were married—such contributions can change part of the character of the business to marital asset.
There are ways you can strengthen the enforceability of a pre-nup, too. For example, keeping accurate business records before and after the marriage will help “establish your earning capacity before the marriage and justify why the value of the business should be considered a separate asset”.
“Having well-kept balance sheets will also help prove to the judge that your marital property never intermingled with the business.”
Apart from you and your spouse signing a pre-nup, it is possible to have your business partner sign a pre-nup as well. Requiring that unmarried shareholders get a pre-nup is increasingly seen in partnership and operating agreements in the business world, and are a wise move. As the business.com article explains:
“These sort of agreements usually include the shareholder’s spouses to sign a waiver of their interests in the business and a provision that stipulates that any transfer of share to the spouse must first be approved by all shareholders.”
Would you like assistance with drafting an enforceable Binding Financial Agreement? Please contact Cristina Huesch or one of our solicitors here at Alliance Family Law on (02) 6223 2400 and take advantage of our free first conference offer so that we can discuss your needs and the way forward.