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Protecting a business from the possibility of the owner's divorce

Even if their marriages currently seem blissful, wise entrepreneurs might do well to have some safeguards in place in case their unions turn sour down the road. This is especially true in community property states, like California, where assets accumulated during the marriage -- including businesses -- are split down the middle. With the divorce rate hovering around 50 percent, it is only good business planning to consider this possibility.

If this business planning occurs before a divorce is even under consideration, a prenuptial agreement or an early postnuptial agreement can designate the business as one individual's property. Alternatively, the business can be placed in a trust to remove it from the marital assets, or a buy-sell agreement can define what happens in certain cases, including divorce. Last, a whole-life insurance policy can help protect the business financially.

If this planning is in reaction to marital problems already under way, it can help to keep personal and business finances separate and keep good records to prove it. The business owner should take a market-rate salary commensurate with his or her position so the spouse cannot sue for a portion of the business equity. If the spouse works for the business, he or she should be moved out as soon as possible. In divorces involving significant assets, the business owner can give up more non-business assets, like collectibles or retirement accounts, in order to try to keep full ownership of the business.

Given that most businesses are sole proprietorships and that a successful business is the surest path to personal wealth, it only makes sense to put down in writing exactly who possesses how much of a business. In community property states, failing to establish legally binding documentation that stipulates who owns the business can be tantamount to giving it away or even killing a previously successful business entity.

Source: Entrepreneur, "How to Divorce-Proof Your Company", Carol Tice, August 08, 2011

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