Divorce can be tough on a business.
When a business partner faces a divorce, the huge impact that has on the partner’s personal life may also have profound effects on the business. So, we want to plan ahead.
Divorces are often problematic because courts do not usually think in terms of the continuity of a business. The court is more interested in ending the marital relationship, and will often treat a business like any other asset — car, home, retirement fund. Usually, this means the court is dividing the assets based on community property or equitable principles. The ownership will be divided among the owners. The spouses will each take a portion of the business.
Meanwhile, a business partner not going through the divorce may be completely involved, caught in an unexpected place. For example, if the court simply divides the partnership interest –whether it be an LLC, corporation, or a limited partnership – the result may be the ex-spouse is added as a partner in the business.
No secret here: Ex-spouses tend to disagree with each other a lot.
In an extreme case, the court might award ownership interest in a business to the spouse who wasn’t a partner in the business. So now the business partnership no longer looks as it did before the divorce.
Regardless the details, if a business partnership is altered by divorce, the impact on the management and continuation of the partnership is tremendous. That’s why we want to put plans in place early in the process to deal with the possibility of partners’ divorce. There are ways to plan to keep the business running smoothly so the economic value is protected.
One of the things that can be done is to have a change-of-control provision that allows partners to rearrange themselves if someone changes control of one of the ownership interests. We can also have buy-sell provisions that are triggered by a divorce. Or we might want a buyout provision that forces a partner to buy out another partner who is getting divorced. In all these examples, the provisions are designed to keep the partnership moving forward through a divorce.
That is the key. We need to run some what-if scenarios, understand what will happen if there is a divorce, and put into place a plan to keep the business moving forward despite any partnership changes triggered by divorce.
We’ve seen many horror stories where there was no plan, the outcomes were unexpected, and partners ended up in unexpected places.
What’s your experience? Have you had issues with divorce or separation of partnerships? How have you planned for these issues? Join us in the comments below and let us know what preparation you’ve put in place.
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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Daniela Corno.
About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment (www.rshawnmcbridelive.com/3laws), gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can reach R. Shawn McBride at firstname.lastname@example.org or (214) 418-0258.
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