For business owners getting married, a prenuptial agreement offers protection for the business by keeping it as a separate asset, preventing it from being divided or liquidated in the event of a subsequent divorce. Although discussing a prenup may seem unromantic, for business owners it is a pragmatic step towards ensuring the stability of their business. This article looks at the issues.
For business owners getting married, a prenuptial agreement offers protection for the business by keeping it as a separate asset, preventing it from being divided or liquidated in the event of a subsequent divorce. Although discussing a prenup may seem unromantic, for business owners it is a pragmatic step towards ensuring the stability of their business. This article looks at the issues.
If you have a family law issue and you feel you need legal advice, contact specialist family solicitor Mark Heptinstall of Slater Heelis Solicitors. He is recognised as a ‘Leading Individual’ in The Legal 500 and ranked in Chambers UK, and is described as having “the amazing ability to bring calm into troubled waters”.
Why should business owners consider a prenup?
Prenuptial agreements are an essential tool for protecting business assets in various types of businesses, from limited companies and partnerships to sole traders. They can provide a clear framework for what will happen to business assets in the event of a divorce and ensure stability and continuity. Although the enforceability of prenups can vary, they are an essential consideration for anyone with significant business interests entering into a marriage. By proactively addressing potential future disputes, a prenuptial agreement can help business owners maintain control over their assets and secure their business’s future.
Here are our key reasons for entering into a prenup:
- To agree how assets would be shared in a divorce in advance rather than when emotions are running high
- To seek total control of your business/side-hustle if you divorce
- To pre-empt any problems you foresee in splitting up the business
- To safeguard or ringfence any inherited property or assets associated with the business, or that you wish to pass on as an inheritance in the future
- To protect yourself, or your spouse from any debts accrued by the business
- To help with succession planning for the business
- To provide a record of the business assets and who owns what
- To prevent any disruption to the business during the divorce
- Set out how any income from the business/investments should be handled
Without a prenup, a business owner may find themselves in a precarious situation, such as losing personal savings to settle a partner’s business debts or seeing their partner end up with a disproportionately large stake in their business. Business owners can also be forced to sell their business assets if they are unable to raise the monies due under the terms of a financial settlement to their ex-spouse.
Limited companies
A prenup can be particularly valuable when it comes to limited companies. Although a limited company is a separate entity from its owners, meaning the company’s assets are distinct from the personal assets of its shareholders or directors, without a prenup, a divorce can indirectly affect the company. For example, if one spouse is a significant shareholder and must transfer shares to the other spouse as part of the divorce settlement, this can result in a shift in control or influence within the company. It could also trigger unwanted clauses in shareholder agreements and dilute shareholdings or force sales of shares at an undervalue.
A properly drafted prenup can set out that any shares owned prior to the marriage remain the property of the original owner in the event of a divorce. This arrangement ensures that the company’s ownership structure remains stable and that business operations are not disrupted by marital disputes.
Partnerships
Without a clear agreement, a divorcing partner’s interest in a partnership could be considered a matrimonial asset and be subject to sharing. This can lead to complications, such as the non-partner spouse acquiring an interest in the business, or the partnership being forced to liquidate assets to satisfy the divorce settlement.
By entering into a prenup, partners can agree that their interest in the business remains separate from the marital assets. Additionally, they can stipulate that any increase in the value of the business interest during the marriage is also protected. This safeguard is critical in making sure the stability and continuity of the partnership, regardless of personal relationships.
Sole traders
As a sole trader, business and personal assets are not legally separate. This means that in a divorce, all assets, including the business, can be shared. A prenup can set out that the business assets owned before the marriage will remain the property of the sole trader during a divorce and also detail arrangements surrounding the division of any increase in the business’s value accrued during the marriage. This provides clarity and security for the business owner.
What are the key components of prenups for business owners?
For business owners, the intertwining of relationships and financial assets can be a complex and delicate balance. As individuals embark on their life together, it is vital to consider the potential impact on the business if the relationship was to end.
A business valuation outlining the value of the business at the time of entering the prenuptial agreement is essential. You should specify how this value will be determined in the future, especially as the business grows or evolves. It should also be considered whether/how this changes or affects the agreement.
You should also define the extent to which the business assets are considered separate property. This includes intellectual property, business profits, and any other assets directly associated with the business.
To further safeguard the business owner’s interests, several additional clauses should be considered:
- Social image clause – this protects the personal and professional reputations of the business owner, preventing an ex-spouse from spreading disparaging or sensitive information.
- Confidentiality clause – if proprietary business information is shared during the marriage, this clause ensures that certain information remains confidential.
- Non-compete clause – this is especially relevant if the spouse is involved in the business. This clause prevents the spouse from starting a similar business or working with a competitor.
- Separate property – this specifies the business and all income derived from it is separate from matrimonial property.
Are prenups enforceable in the UK?
The legal standing of prenups in the UK is that they are not legally binding. However, they are given considerable weight by the courts, particularly if both parties have received independent legal advice, made full financial disclosure, and entered into the agreement voluntarily without undue pressure.
In addition, for a prenup to be effective, it must be considered fair. Agreements that appear to unfairly disadvantage one party are less likely to be upheld.
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