A divorce can obviously mean the breakup of a family, but what many people don’t count on is the fact that it can also mean the destruction of a family business.
David Beaver, a divorce attorney for Stark & Stark, has seen small businesses go down in flames when their owners get divorced. “It’s very rare — no one wants to stop making money — but I’ve seen situations where this has really put the death stroke to a business,” he says.
Beaver will present a seminar on strategies for keeping family businesses in the family on Tuesday, July 14, from noon to 1 p.m. at Stark & Stark’s office at 993 Lenox Drive in Lawrenceville. The free talk will cover strategies for protecting business interests and inherited assets during a divorce.
When a spouse wins a percentage of a business during a divorce, the person who owned it originally faces the choice of buying them out, or continue to run the business with a silent partner taking a percentage of the profits. That can cause tension, especially if other partners are involved, and Beaver has seen more than one business go down because of that scenario.
According to Beaver, the most effective strategies for settling a divorce are the ones used long before any thought of divorce comes up.
Title Case. Beaver says it matters a great deal whether the business is registered to the original owner, or if it also has the spouse listed as a co-owner of an LLC. If the spouse is a co-owner, they may have a greater claim to the business during a divorce. Not listing them can be a safeguard though not a total one. Even if a spouse is not on a title, he or she could still claim part ownership of the company based on the amount of work they put into it over the years. For example, if a man owned a family business that was a pizza parlor, and his wife kept the books, made pizzas, or worked the front of a house, a court would award her some amount of interest in the company.
The amount would vary because New Jersey, unlike some states, awards marital assets equitably rather than splitting them 50-50.
Prenup. Better still is to put the business off the table before the marriage, let alone the divorce, ever begins, by signing a prenuptial agreement before the wedding. “This is probably the most important protection you can negotiate,” Beaver says. “A prenup can identify a business interest and say that no matter what, this is out.”
A prenup by itself is not ironclad, because a spouse could still challenge its validity in court (a practice that Beaver says is becoming more common.) “For it to be binding, there needs to be a disclosure by the business owner to the future spouse of what income the business is generating and what the assets are of the business,” he says.
Safe deposits. Once the business is up and running, the money it generates has to be deposited somewhere. That money can be more or less susceptible to being awarded to a spouse depending on where it’s placed, whether it’s a personal account, a joint account, or a business account. One mistake that Beaver sees people make is for business owners to use their business accounts for personal expenses like cars, vacations, and the like. “You can’t have it both ways,” Beaver says. “You can’t have this business as its own entity on this island, but still pay personal expenses from it.”
A family run business could also become a marital asset over time, if it goes through changes during the marriage. For example, if a woman is part of a family owned pizzeria business but decides to strike out on her own with her own location, and creates a new LLC with her husband’s name on it, he could claim part of the business in a divorce. The same could be true if she took out a loan against her house (jointly owned with her husband) to buy new pizza ovens. Because the husband had put his own money at risk via the loan, he would own some of the pizzeria.
Beaver says he often deals with clients who have made such deals without thinking about what they might mean in a divorce. They may not have meant to give part of the family business to their spouse, but in divorce court, intentions count for less than actions. “What your grandmother or grandfather worked so hard for might really be in jeopardy because of something they didn’t mean to do,” Beaver says. “But a court might look at it and say, ‘Sir or ma’am, you made this decision. You’re an adult. By doing what you did, you changed the nature of the beast.’”
When a family business is part of a marriage, Beaver advises the person removes emotion from it as best they can and treat the business side of it more like a business partnership between equals, where rights and responsibilities are clearly defined, to avoid conflict later on if there is a divorce.
“I don’t understand why people don’t look at their marriage that way,” he says. “Why wouldn’t you go above and beyond to protect your business interest that you have put everything into?A conversation needs to be had so everyone is on the same page. It could really put all those years of hard work down the drain.”
Beaver grew up in Washington Township, Gloucester County, where his father worked for the government and his mother was a homemaker. He earned a bachelor’s degree at Rowan, and a law degree from Rutgers before becoming a clerk to a family court judge. He has been practicing family law for eight years. Beaver admittedly doesn’t follow his own advice when it comes to acknowledging the possibility of a divorce down the road. He is married to his college sweetheart, who is also a divorce lawyer, and who works at rival law firm Fox Rothschild. (“If you can’t beat ‘em, marry ‘em,” Beaver says.) They have a daughter and live in Robbinsville.
Beaver says being a divorce lawyer involves almost as much psychology as it does the law. In a divorce, it pays to pick one’s battles wisely, since attorneys’ hourly rates can make almost any battle a pyrrhic one. “My advice is to know the true value of your case,” he says. Beaver says clients sometimes make irrational decisions about these kinds of fights when discussing divvying up possessions in a divorce. “You don’t spend $10,000 to chase $5,000. It’s an empty victory. What’s the point? If you win your favorite microwave and it cost you $3,000, you could have used that money to buy the world’s best microwave. Most likely three of them.”