In many states, including New Jersey, a business started during a marriage is considered community or marital property, which means that it is owned by both spouses and will be divided if they divorce. If the business began before the marriage, but grew substantially during the marriage, its appreciation in value is also considered marital property and will be treated as an asset in a divorce.
A prenuptial agreement can be used to plan how an existing or future business will be treated in the event of a divorce. This can save a lot of headaches and expense. If a divorce occurs without a prenup, and there is a substantial business asset, there will have to be a valuation done of the business. Typically, each side gets their own expert to perform a valuation, and the results can vary greatly. Then a judge must decide which expert to believe.
In some cases, it is entirely plausible that the entrepreneur may either have to sell the business to give his or her ex their share, or, if the business can’t be sold, may have to give up other marital assets to an ex in lieu of their share of the business.
The structure of the business will also determine how business assets are handled in case of a divorce. If the business is a partnership, it is owned by the partnership entity, not by the individual partners, who can only dispose of their interest in the partnership. Any distribution of profits or income from the partnership during a marriage is considered marital property even if the spouse’s interest in the partnership is separate property.
If the business is a corporation, its assets are neither marital nor separate property; only a spouse’s interest in the corporation may be awarded by a court. If the business is a sole proprietorship that was established during the marriage, all of its assets are considered to be marital property that is subject to equitable distribution in a divorce.
Parties to a prenuptial agreement can determine in advance whatever terms they desire with respect to the disposition of business assets upon divorce. If you started your company prior to your marriage, there may be portions of the business that could be considered separate property and not subject to division in a divorce. The prenup can spell out which party retains exclusive rights and interests in an existing business, and will be valid unless the agreement is deemed to be unconscionable at the time of execution.
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