In New Jersey, virtually all assets acquired during a marriage (“marital assets”) are divided between the spouses during a divorce. A business is considered such an asset. Exceptions to this rule include inheritances or gifts, which are common in many businesses. For instance, sometimes a business owner places the name of his or her spouse on the title of the business or allows a spouse to build up “sweat equity” by being active in the business. When these things are done, the business owner risks having to give value for the business upon divorce.

I had a case in which my client (the wife) had ownership of a few shares in her husband’s family’s business, which was a very successful company. His family took discrete steps to restructure and insulate the company shortly after the husband filed for divorce. Under the new shareholder agreement prepared by a major law firm for the company, my client was about to lose virtually all entitlement to her equitable share of the business in the divorce!

Even though this was a business transaction outside the divorce proceedings, I intervened in the corporate restructuring. I was able to demonstrate that they were committing fraud with this restructuring, which to me was an obvious attempt to oust my client from her substantial equitable entitlement. I am pleased to say that the company and their lawyers backed off entirely from attempting to enforce their new shareholder agreement. In due course, my client received her fair and substantial share of the value of the business.

In the above example, I acted for the wife, who had a legal and equitable interest in the business. When I represent the individual in the marriage who owns a business, I guide them to protect their assets (and their family’s assets) from division in divorce. The most crucial aspect of protecting one’s business from asset division is the timing of the attempt to protect the business. Here are some legal ways to protect a business before, after and during the divorce:

1. Premarital Agreement (“Prenup”): An agreement by a couple signed prior to marriage, setting forth their rights and obligations in the event of separation or divorce, including support. A prenup can include that the business remains a “separate” asset even after the parties marry. For example, if a family business is going to bring the future son-in-law into the business, this agreement can require him to waive any future ownership claims.
2. Postnuptial Agreement (“Post Marriage”): If you are already married, it is not always too late to have an agreement prepared which can outline how the business assets will be handled in the event of a divorce. There are limited exceptions (one is called a “reconciliation agreement” but these are very difficult to enforce). Make sure to consult an attorney who knows how to do these to make sure the agreement is binding and enforceable.
3. Safeguard Financial Records: Keep accurate financial records of your business, including all income, assets and expenses. This can help demonstrate the true value of your business.
4. Avoid Co-mingling: Keep your personal and business finances separate. Mixing them up can complicate asset division during a divorce. Better to keep separate bank accounts, credit accounts, and maintain clear documentation of business transactions. Avoid at all costs dealing in cash, which will be used against you down the road and could cause a court to impute income to the business since there are untraced “cash” transactions.
5. Trusts: Prepared prior to the marriage and not requiring consent of the future spouse, this provides that ownership of the business (or at least your share of the business) would be placed into a trust that would own the business interests and protect them from division.
6. Shareholder Agreements: Also prepared prior to the marriage and not needing consent of the future spouse, these can specify who can own shares and how to value them in the event of a divorce. For example, the groom who works in the “family business” will be required to sign the shareholder agreement prior to the marriage to limit the right of the future bride to claim ownership in the business.
7. Isolating the Business: A spouse should keep the business operations separate from the marriage. The more a business owner lets the spouse get involved in the pre-marriage business, the more likely the business will become a marital asset open to division.

If a business is not completely protected from equitable distribution, what usually happens is one of two things: 1) A buy-out from other assets whereby a business owner spouse exchanges ownership in other assets for the value in the business; 2) Long-term payout if business cash flow permits; this method is often preferred by a business owner. If neither of the above is viable, selling the business might be the only option, but this is rarely done.

The best simple rule is for you and your family (if this is a family business) to plan to protect the business while you are still single. Legal requirements need to be carefully followed to ensure the plan is enforceable if challenged. If you are at the other end of a spouse seeking a fair share of a spouse’s business, we analyze the legitimacy and fairness of the protections. Remember, divorce laws and procedures can vary, so make sure to consult with a family lawyer familiar with the laws of your jurisdiction to understand your rights and options. The right family lawyer will help protect your business assets during a divorce with a personalized and custom-made plan based on your unique circumstances.

Robert Kornitzer Esq. is certified by the Supreme Court of New Jersey as a matrimonial law attorney. He has been ranked by Best Lawyers as one of New Jersey’s top family and divorce attorneys for the past five years. As a dual law and MBA degree holder from Boston University, with extensive business experience, Kornitzer brings unique expertise in both the legal and financial aspects of all issues related to divorce. Contact [email protected].