Business and marriage require similar ingredients for success: determination, hard work, passion, vision, and a tolerance for risk when you start a new business venture or rather, a leap of faith when you get engaged.
So how does one affect the other?
Marriage can affect business in many ways, both personally and professionally, but legally it affects your ownership of property, and most specifically, your business interest.
If you run a small business and have recently become engaged, it’s important to understand how your nuptials will change the status of your business and what steps you should take to protect your assets before you tie the knot.
Separate and Marital Property
When you enter into a marriage, the property you acquire after marriage is typically considered marital or jointly-owned property. This means both you and your spouse own that property together and are both entitled to a portion of it if you ever get divorced. For instance, if you bought a vehicle during your marriage using funds from a shared bank account, you would share ownership of this new car with your spouse.
Separate property is generally classified as the property you had before marriage, any inheritance/gifts you received solely as an individual (before or after marriage), personal injury proceeds, or any property that you previously agreed was separate.
Separate property may become shared if it’s added to your marital property. For instance, if you owned real estate prior to marriage, and then added a spouse’s name onto the deed, that property would then be considered marital property.
It’s important to understand that all active income or assets that you acquired post-marriage can potentially be classified as jointly-owned property, unless it was solely purchased in your name with no benefit to your partner.
Appreciation in Business Value
If I began my business before I got married, is it considered separate property?
While you may have started your business prior to marriage, giving it separate property status, it may not stay that way afterwards.
If your business increases in worth after marriage, this revenue growth may be viewed as marital property because it is active income you acquired post-marriage. In other words, your spouse may be entitled to any subsequent appreciation in your business’s value, especially if he or she contributed to this gain with ideas, capital, or simply his or her services.
To further illustrate this point with another example, perhaps you renovate property that you own apart from your spouse, during your marriage. Your spouse may be entitled to a share of the property’s appreciation after you made the renovations.
In summary, any separate property that increases in value after marriage, either as a direct or indirect effect of marital effort, may be classified as marital assets, and be subject to equal or equitable distribution rules in the event of separation or death.
Community vs. Equitable Distribution States
If your marriage ends or you pass away, shared property is, by default, distributed according to the state you reside in.
There are two types of states: community property and equitable distribution states
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska (if both spouses agree to make certain assets community property). These states consider property to be held equally. If your marriage ends, each partner is entitled to 50% of all marital property.
Equitable distribution states include the states not listed above. When a marriage ends, or a spouse dies, the marital property is split according to factors such as length of marriage, income of spouses, standard of living, age/heath, and more. The entitlement is divided in such a way that is considered fair to both parties.
In the case that your business increases in considerable value, your spouse may be entitled to a sizable portion depending on the state you live in.
Conversely, if your business depreciates, or you find yourself in debt, your spouse is not liable if you live in an equitable distribution state, because that debt is yours alone. In community property states, creditors can look to the other spouse for remedy because ownership is shared 50/50.
How to Protect Your Business Interest
Just like you would protect your business in any other type of relationship (employer/employee, consultant/client, and business-to-business) through written agreements, you should take steps to protect your business when changing your legal status from single to married.
One way you can do this is by distinguishing separate and marital property before marriage with a prenuptial agreement.
A prenuptial agreement is a legal document that can help ensure your business remains yours if you ever divorce by agreeing that your company remains separate from jointly-owned property. The prenup should be in writing, with all your assets listed, and signed by both you and your future spouse.
Other ways to protect your business is to not commingle its assets with your marital property, and avoid using marital income (jointly-held funds) to fund the business, or oppositely, using non-marital funds to pay for marital assets/debts. It’s best to keep these two properties as separate as possible to lessen the chances of disputes over what is jointly owned. Another option is to place your business in trust.
Preparing For Marriage
Protecting your business may be the last thing on your mind, especially when you just got engaged.
However, failing to think about these things now is an oversight many business owners wish they had planned for. Not because they thought their marriage was going to fail, but because the alternative to not protecting themselves at the beginning is far worse than getting caught in a legal battle that can potentially destroy what an entrepreneur has worked so hard to build, later on.
Your business may be your greatest accomplishment, and keeping it in tact is something you should invest in, so whether things go well, or the opposite, you can bank on your property being safe either way.
Like most things in life, we can’t always control what happens in the future. There are no negative consequences to being prepared and protecting your business. While you may feel that protection is unnecessary, it is the one of your only options for remaining in control of your business, and your financial future.
Would you get a prenuptial agreement? Why or why not?