The role of prenuptial agreements in safeguarding business interests in divorce
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If you own your own business, there’s a good chance that you have a lot of measures in place to protect it – but this could all be for nothing if you lose part of it in a divorce. In this article, we’re explaining the role of prenuptial agreements in safeguarding business interests in divorce.
A divorce can impact every aspect of your personal life, including your bank balance, where you live and how much contact you have with your children. Bristol divorce solicitors receive a number of enquiries from clients whose businesses have also been affected by a marriage breakdown.
In this article, we’re explaining the role of prenuptial agreements in safeguarding business interests in divorce.
What is a prenuptial agreement?
A prenuptial agreement or “prenup” is a contract which is drawn up between a couple prior to their marriage. This document – which will usually be created and filed by a solicitor – details who should get what assets in the event that the marriage ends and in what circumstances.
For example, the document might state that one party will receive £500,000 if the marriage ends amicably within five years, but only £100,000 if the marriage ends due to infidelity by that person.
A prenup is usually created to protect the wealth of one of the parties and is predominantly used by those who have a significant amount of wealth or assets. A recent example of this would be Sir Paul McCartney who was forced to hand over £24.3 million of his fortune to his former wife, Heather Mills, due to the fact that he chose not to have a prenuptial agreement in place.
How can a prenup safeguard business interests in a divorce?
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If you own your own business, you’ve most likely put in a lot of blood, sweat and tears to make it work. Similarly, when you entered into a marriage, there’s a good chance that you were determined to make that work too.
In an ideal world, both of these things would form a happy ever after but, that isn’t always the case. In many instances, the breakdown of one will impact on the other. In this section, we’re looking at how a prenup can safeguard your business.
What’s mine is yours
If you own or co-own a business which you founded prior to marrying your spouse, there’s a good chance that your spouse will be unsuccessful in a claim to this business in the event of a divorce. If, however, your business was set up or acquired during the marriage, it may be considered to be a marital asset – which means that your spouse may be able to lay claim to a chunk of your hard work.
What a prenup protects
While many may see them as unromantic, there are some very good reasons for opting for a prenuptial agreement – and your business is one of them. This document can help to protect your business by:
Exclusion
When drawing up a prenup, you can choose to exclude your spouse from making any claim on your business – even if the business is set up subsequent to the marriage. Although your spouse may have the right to challenge this in the event of a divorce, they are unlikely to succeed unless they are able to prove that they signed the prenup under some form of coercion or duress.
Terms
With a prenuptial agreement, a business owner might choose to include their spouse in their business interests by offering either shares in the business (which will mean the couple remain connected) or by making a financial payment in lieu of any business interests. This will usually prove to be a win-win for both parties.
Debt
When a business is considered to be a marital asset, this can mean that its debts are shared along with personal ones. This is one instance in which the non-business owner may be protected unless stated otherwise in the prenuptial agreement. A prenup allows both parties to come to a fair decision as to what will happen to business debts in the event of a divorce.
Prenups in 2023
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Although prenuptial agreements were usually only used by the rich and famous in order to protect their considerable wealth along with their professional reputations, this is now very much not the case. Figures show that, in the UK, one in five marriages now start with a prenup as more and more couples understand the benefits of this document.
For business owners, failing to create a prenuptial agreement can be particularly damaging. Without this agreement in place, a spouse may be able to claim a substantial amount of money from the business – even if they have never been involved in running or investing in it.
Worse still, a court may rule that a former spouse is to be given shares in the business meaning that they may, potentially, have a say in how the company is run. While many people still don’t like the idea of a prenuptial agreement, for company owners this simply makes good business sense if you don’t want to find yourself handing over your hard-earned company.
