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Can your partner’s divorce affect your business? Yes

On Behalf of | May 5, 2020 | Business Law |

You and your business partner grew your Massachusetts company together. Now, your partner and spouse are divorcing. It’s a sad time, but the business shouldn’t be affected.

Or will it?

Unless you and your partner previously made written provisions to address a divorce among the ownership ranks, your partner’s divorce could wind up negatively impacting the business.

Here are some scenarios that could occur:

  1. A payout to the nonpartner spouse in shares. The partner’s ex could wind up with voting rights, and that could cause trouble if the partner is unfamiliar with the industry or decides to sell the shares.
  2. A payout to the nonpartner in cash. Where will that money come from? Will the other partners need to pitch in financially to, in effect, buy the ex out of the company? If that’s the case, you might have to turn over a number of sensitive company financial documents, and it could require your employees to prepare the documents or be deposed. If this happens, insist on a confidentiality agreement, so an ex-spouse can’t spill any company secrets.
  3. Divorce is emotional, and your ex could wind up emotionally checking out. Even worse, they could do something to harm the business’ bottom line to make it less valuable.

So, what should you do to avoid such scenarios?

As your form the business, or even after it’s been up and running for a bit, have a talk with your partners about the possibility of such a situation down the road. The partnership group all could execute prenuptial or postnuptial agreements that specify the business isn’t a marital asset.

If the company has yet to be formed, your formation documents can include language that spells out that business assets can’t be transferred in a divorce unless all the partners give their OK.

If any of the partners’ spouses work in the company, don’t take their work for free. Compensate them at the same rate you would pay an employee from the outside. By doing so, an ex-spouse can’t demand a larger share to compensate for free work through the years.

Finally, if you think your partner’s marriage could be headed to divorce court, change your voting shares from preferred to common. Those voting rights can’t change ownership.