“What measures should I take to divorce-proof my business?” I get this question fairly regularly from business owners. But, I think the more appropriate question is “how can I divorce-ready my business?”
Similar to the assets of a marriage, the assets of a business are considered mutually owned within a marriage. The complexity of a business can make it far more difficult to place a value on than the assets of a marriage, so it’s important to understand its value before marriage. The other objective is to try to get your spouse to agree to a few prearranged measures before the marriage starts to unravel. Failing to do the following may result in your ex-spouse becoming an unexpected partner within the business, or you may be investing all of your resources fighting to prevent your business from being sold for cash to satisfy a divorce settlement.
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Create a Buy-Sell Arrangement within a Shareholder Agreement
Whether you’re the sole stakeholder or whether you have a number of shareholders within the company, ensure you address what happens in the event that one of the shareholders goes through a divorce. A buy-sell arrangement will allow existing shareholders to buyout half of the other shareholder’s stake in the business. This prevents an ex spouse from becoming an unwanted shareholder in the business. It also ensures the management of the business does not become compromised in the event of a shareholder’s divorce.
Sign a Prenuptial Agreement
Many business owners are asking spouses to sign prenuptial agreements. By having and signing this document, both parties acknowledge that the business existed prior to start of the relationship. A prenup won’t necessarily prevent a spouse from going after the appreciation in the business if the relationship dissolves, but it will help to establish what the situation was prior to the commencement of the relationship.
Purchase a Corporately-Owned Permanent Life Insurance Policy
If your company is doing well, purchasing a permanent life policy is a great way to place excess capital within your corporation, pay less tax, have your surplus cash within the policy grow on a tax-free basis, and leverage the cash value of the policy to help fund a divorce buyout. There is no such thing as Divorce insurance in Canada, but consider this the closest available product.
Keep Your Business Finances Separate from your Personal Finances
This line cannot be crossed. As soon as one party can prove that finances between personal and the business were connected, it makes it exceedingly more difficult to prove that these assets should be treated distinct and separate. This means no personal loans between the entities, credit cards are separate from one another, and no investments of property are purchased for the exclusive benefit of the family (cottages, rental properties, vehicles). If in doubt, request the opinion of an accounting professional.
Pay Yourself What You’re Worth
Many entrepreneurs tend to take lower salaries or deferred salaries until the company has the financial legs to stand on its own. They may opt to bonus or dividend themselves money on occasion, but many will opt to leave excess salary in the company in the form of retained earnings. Some lawyers may argue that in doing so, it was depriving the family of what was rightfully theirs. Ensure that you take a salary/bonus that is comparable to what your talents might fetch on the open marketplace.
Sacrifice Other Assets
If you want to retain ownership of your business, you may want to sacrifice other assets in lieu of holding onto control of your business. You may want to give complete ownership of the matrimonial home, recreational properties or investments to your spouse instead.
Get Help from a Financial Advisor
If you decide to liquidate assets (life insurance, registered and non-registered investments, recreational properties etc.,) you likely will be subject to tax. By engaging a financial advisor, you will have better information regarding the most tax-efficient way to liquidate assets, and will be given guidance as to how you can attract less tax.