But you probably wanted a more detailed answer than that.
Starting a business with your family or partner can be a wonderful thing, and thousands of very successful corporations started out as family businesses. But along with the advantages of forming a company with someone you are so close to, come some pretty significant disadvantages. Mainly, what happens to the business if the marriage breaks down, and you decide to go your separate ways? Does it keep operating? How does it work? What if one partner wants nothing to do with it any more?
That’s why corporate prenuptial agreements are important.
The Corporate Prenup
Let’s start with the basics. A prenuptial agreement (or prenup) is a written agreement entered into by a couple before marriage, which sets out how assets will be divided and handled if they divorce or if the marriage is dissolved. This is a legal document, and while it is not technically legally binding, if both parties entered into it willingly, understood what they were doing and there were no factors that make entering into the prenup unfair, then it will be upheld by the courts. And if you are both owners or shareholders in a business, then a prenup can also act as protection for your business interests, specifying what should happen in the event of a divorce.
This is something the couple need to have discussed at length before a document is drafted up, and there should also be a ‘backup’ plan in case the situation isn’t as amicable as they had planned. Yes, we know it’s not something anyone likes to think about, but if you’re going to run a successful business, sometimes you’ve got to have difficult conversations. And the reality is that a divorce could very easily put your business at risk. Especially since businesses are no different from any other asset, and they will be taken into consideration in any financial settlement in the event of a divorce. Which is why it’s generally a good idea to have agreed on the best course of action in advance, and have it written down in a prenup.
Reasons Business Owners Might Consider a Prenup
There are a number of reasons a couple that own a business together may want to enter into a prenup. Just a few include:
- To agree calmly, in advance, how business assets would be shared in a divorce (rather than during the emotional time when you’re splitting up).
- To seek total control of your business after the divorce.
- Because you believe it could be a problem to split up the business (this is often the case with family businesses).
- To safeguard or ‘ring-fence’ any inherited property or assets associated with the business, or any that you want to pass on as an inheritance in the future.
- To protect yourself or your spouse from any debts accrued by the business.
- As a record of the business assets, and who owns what.
- To prevent any disruption to the business during the divorce.
Some Points to Consider
A prenup protects both spouses and the business, and acts a bit like lifeboat on a cruise liner – you hope you won’t need it, but you’ll be very grateful it’s there if things go south. A few things to bear in mind when drafting your prenup (and when setting up your business in general) that can provide some protection in the event of divorce. For example:
- The company articles of association and shareholders agreement should be carefully designed to accommodate the individual needs of different shareholders. For example, you may want to prevent a shareholder from transferring ownership of shares to a family member or close friend without prior consent from other shareholders.
- Agree on a method of valuing the shares in the company in advance.
- Create separate classes of shares, each with different rights (non-voting, voting, enhanced, capital rights, limited capital rights etc). Thus allows a level of control and oversight over shares at all times.
- Agree on how shares are allocated, moved, sold and reissued in advance.
If you’re considering going into business with a spouse, or you are engaged to marry your business partner, then we strongly encourage you to put some legal protections in place, just in case.
At 2020 Business Law, we help business owners make the right decisions for their business, and protect their assets with 2020 vision. If you would like to know more about a prenup for your business, or just want to discuss your options, then please just get in touch with us today and book your free consultation.