Navigating business ownership and divorce

While a prenuptial agreement might not be top of mind during wedding planning, for business owners, it can serve as a vital financial safeguard – protecting what you’ve worked so hard to build. This martial contract defines each spouses’ assets and debts and outlines how they’d be allocated in the event of a divorce or death. In some instances, the appreciation in value of a business can be deemed a martial asset if it occurred during the marriage. That’s why it’s critical to plan ahead and understand how a divorce could impact your business.

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By the numbers: Business ownership and divorce

Running a business is more than a full-time job – it can be time-consuming and stressful – often causing strain on an entrepreneur’s health, family, and marriage. Studies estimate that 43-48% of entrepreneurs and small business owners experience divorce – significantly higher than the general population¹.

Even more so, the divorce rate for Americans over the age of 55 has doubled since 1990 – commonly referred to as “gray divorce².” Getting a divorce can come with a high price tag for anyone, but for older individuals, the costs can be steeper – especially the more assets and wealth you’ve accumulated over the years.

Prenuptial planning for business owners

Before marriage, few couples want to talk about the possibility of things ending in a divorce. But as an entrepreneur, it’s a tough and uncomfortable conversation that needs to be had – especially since your business can be considered by the court to be a martial asset.

That’s where a prenup comes in – which is growing in popularity among U.S. adults. In 2010, just 3% of Americans who were married or engaged reported signing a prenup³. In 2022, that number increased to 15%, with half of adults surveyed supporting using prenups⁴. A prenup helps clarify ownership, protect future growth and appreciation, and prevent costly legal disputes down the road. Even if you’re already married, a postnuptial agreement can serve a similar purpose, offering a layer of protection as your business evolves.

A prenup helps clarify ownership, protect future growth and appreciation, and prevent costly legal disputes down the road. It’s important to understand that a prenup does not exclude one party from accessing the other’s assets; rather, it allows both individuals to mutually agree on how assets – including investments, retirement funds, property, business interests, and expected inheritances – should be distributed in the event of a divorce.

Additionally, a prenup can protect one party from the other’s existing debts, which may offer a less confrontational way to introduce the topic. It should be pointed out that each state has its own legal requirements, so working with a qualified attorney is essential to ensure the agreement is valid and effective.

Protecting business interests when both spouses are involved

Running a business with your significant other can be incredibly rewarding, but it also introduces complexities – especially if the relationship ends. For entrepreneurial couples, it’s essential to formalize roles and responsibilities in writing. Establishing a buy-sell agreement can clarify what happens if one spouse exits the business, while a succession plan helps ensure continuity regardless of personal changes. These steps not only protect the business, but also reduce emotional and financial strain during a separation.

If only one spouse legally owns the business but both partners contribute to its operations, courts may view through an equitable lens. The more involved each person is in the business, the more likely it is that both will feel – and potentially be granted – a sense of ownership.

To safeguard your business in the event of a divorce, consider forming a legal entity such as an LLC, trust, or corporation—even if you’re the sole owner. This structure helps separate your personal identity from the business, offering an additional layer of protection and clarity in legal proceedings.

Understanding the division of assets in a divorce

To understand what may be at risk during a divorce, it’s important to distinguish between separate property and marital property. Assets acquired before the marriage—such as a home, retirement account, or inheritance—are typically considered separate property. In contrast, assets acquired during the marriage are generally classified as marital property and subject to division.

The same principle applies to business ownership. A business started before marriage may be considered separate property, but any appreciation in its value after the wedding could be viewed as marital property. For example, if your spouse becomes involved in the business or if personal and business funds are merged, a court may determine that the business is marital property.

In community property states—such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—marital assets are typically divided equally⁵. In all other states, equitable distribution rules apply, giving judges discretion to consider factors like fairness, each spouse’s financial independence, and the length of the marriage⁶.

Assets held in a trust are usually considered separate property, unless the trust includes marital assets or is used to pay for marital expenses. Because asset division laws vary by state and can be complex, it’s essential to consult with financial, legal, and tax professionals to ensure your interests are protected.

Business valuation in divorce

Regular business valuations – conducted annually or every few years – can simplify negotiations during divorce proceedings. If a valuation is needed, there are several approaches to consider:

Asset approach

Calculates value by subtracting liabilities from assets, often used when liquidation is a possibility.

Market-based approach

Compares your business to similar companies in the market to determine value.

Income approach

Estimates value based on projected earnings and cash flow.

Imagine your ideal outcome

What a couple chooses to do with their business may depend on the state of the relationship at the time they decide to divorce. If both parties have a financial interest in the business and their divorce is amicable, they may choose to maintain joint ownership and continue working together. However, they may prefer to part ways and not continue as co-owners.

If this is the case, one option may be to sell the business and divide the proceeds. While this may seem straightforward, it’s not always ideal – especially if the sale occurs during a downturn or before the business reaches its full potential. In such cases, a buyout may be a better solution. One spouse can offer cash or a combination of assets – such as a vacation home or investment portfolio – equal to the other’s share of the business.

Ready to move on from your business? Here’s what you need to know for a successful sale. 

Securing your financial future

Divorce often brings competing interests and emotional challenges. That’s why having a team of trusted advisors who collaborate effectively is so important. Advisors who lack alignment or a full understanding of your situation may unintentionally work at cross-purposes. A coordinated team – one that understands your goals and communicates clearly – can help you stay focused on securing your financial future.

Getting the advice you need

Divorce is never easy, but with the right guidance, you can protect your business and financial well-being. Huntington advisors are here to help you navigate asset protection, business continuity planning, and strategies tailored to your unique circumstances.

Contact your Huntington team or find a location near you to learn how we can help protect your assets.