If you were asked to make a list of resources essential for running a business, you’d no doubt include such documents as a business plan and an LLC operating agreement. So what would you think if I told you a prenuptial agreement is an equally important, albeit unexpected document you should also include in your business toolkit?

A prenup may seem like an irrelevant document when it comes to managing your business, but this couldn’t be farther from the truth. It’s an underutilized legal document which has the potential to protect your business’ finances and assets in a way like no other.

Sound too good to be true? Here are 3 scenarios which will convince you that a prenup is an essential document for your business.

1. Without a prenup, your business could be considered marital property

One of the most significant, yet not often anticipated, changes heralded by marriage is to the legal status of your property. When you get married, depending on your state and particular circumstances, your property can become swept under the blanket of ‘marital property’.

Marital property is the legal term which describes property acquired by either spouse during the course of a marriage. The implication for your business if it is considered marital property is that your partner has legal grounds to claim it as their joint property.

According to Orrit Hershkovitz, a family lawyer in New York, “In all jurisdictions, most property that is acquired during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action is deemed marital or community property, regardless of the form in which title is held.”

In other words, if you started up your business during the course of your marriage, a judge could order you to split your business and any other assets termed as marital property with your partner. This scenario could eventuate even if your partner didn’t contribute at all to the creation or subsequent profitability of your business.

That is, unless you have a prenuptial agreement which clearly states otherwise. It is one of the few mechanisms you can use to prevent assets and property from being considered in joint terms during a divorce. A prenuptial agreement made with this objective should include a clause which specifically addresses the fact that certain assets or property – such as your business – should not be defined as marital property.

2. Without a prenup, your business could also be considered premarital property 

If you started your business before you got hitched – it won’t be affected in the event of a divorce, right?

Actually, it could be. If you reside in one of nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the business and related assets you accumulate before marriage could be fair game during the division of property in a divorce.

This is because in these states, the property, assets, and incomes of married couples are considered jointly owned.

“If pre-marital property becomes mixed together with marital property, it could all be considered marital property,” says Michelle Yang, a lawyer at LegalTemplates.net. “In which case, your partner could be legally entitled to a share of your pre-marital property business in a divorce proceeding”.

Moreover, if you started your business before marriage, your partner could still be entitled to upwards of half the value of appreciation your company experiences during the course of your marriage.

“If your company was worth $1 million before you got married and $2 million at the time of your divorce, your spouse is entitled to 50 percent of that $1 million increase in value,” explains Erik Episcopo in his article ‘Divorce is a Business Threat’.

You may not envision that your business could grow to the extent that you’d ever need to hand over millions in a divorce. But that misses the point entirely. A prenup puts legal protections in place to guard your business against the financial risks associated with divorce.

3. Without a prenup, you could lose a lot of money trying to retain ownership of your business

The average cost of divorce is in the ballpark of $15,000 to $20,000. One factor, however, which hugely influences the final cost relates to the number of contested issues. The more contested issues, the more drawn out the divorce process, the more lawyers and legal fees to pay… you get the point.

So what does this mean your business? If the terms of how your business will be divided (if at all) in a divorce are unclear, the matter becomes open for dispute. Without a prenup which spells out how your business should be handled in a divorce, you are leaving it completely and utterly vulnerable.

While it’s not nice to think that your loving partner could ever “come after” your business, it’s a scenario which plays out time and time again. Just ask Tereson Dupuy, who discovered her business would be considered a joint marital asset during her divorce. She didn’t have a prenup in place, and a judge eventually gave control of her company to her ex-husband.

Cases like these are prompting more business owners to recognize the importance of getting a prenup. After all, with the staggeringly high rate of divorce in the US, it’s no longer viable to dismiss a prenup on account of how “unromantic” it is.

As a business owner, simply having faith that your (ex) partner will do the right thing by your business won’t mean anything when you’re battling out the terms of your business ownership in the courtroom. Why take such a big gamble when so much is at stake?

A prenup is one legal mechanism at your disposal to help protect your business in the event of a divorce. Not having one is a risk that could cost you thousands in legal fees, and worse, the reigns of your business.

Monica Mizzi is the editor and legal writer for LegalTemplates.net, a website which equips people with the right tools and free legal documents to become their own legal advocates.

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