A divorce is already an emotional, challenging, and expensive time. But you may wonder, “What happens if I start a business before my divorce is final?” You could launch a business while going through a divorce, but there can be legal and financial implications. However, the peace of mind in knowing you’ve got a new revenue stream and focus can be worth it. Read on to understand the implications of starting a business while going through a divorce.
Can You Start a Business While Going Through Divorce?
It’s possible to start a business during your divorce proceedings. You could start the business alone or with a business partner. However, enlisting the support of an experienced attorney can help ensure that the new business remains yours as the implications for each divorce case are unique.
The advantages of starting a business while going through divorce are that it gives you a fresh start, a new income stream, and a new focus. It can be a way to direct your attention productively while going through a divorce.
On the other hand, the disadvantage of starting a business during a divorce is that there could be legal or financial consequences in your divorce proceedings. It could also be a busy time juggling between the divorce, existing businesses or employment, and family responsibilities. Whether it’s the right time to start a new business for your focus and mental health will vary by individual.
What Happens If You Start a Business During Divorce?
In some states, such as New Jersey, all assets, including a business legally acquired during the marriage, are subject to equitable distribution. However, a marriage is defined as the time between the date of the marriage and the date someone files for divorce.
That means it should be protected if you create the business after filing for divorce. However, state laws vary, and the implications in individual states and divorce proceedings can vary greatly. Speak to a divorce attorney in your state to understand the specific implications and any actions you’ll need to take to protect a new business before the divorce is final.
Key Considerations in Starting a Business While Getting Divorced
When starting a business before finalizing a divorce, here are key considerations to keep in mind:
1. Legal Consequences and Challenges
The legal implications of starting a business before the divorce is finalized vary by state. In some states, the business might be considered marital property and subject to division during the divorce proceedings, especially in community property states.
In that case, you’ll also run into valuation issues, as in a divorce. For one partner to buy the other out, the court will consider not only current business value but loss of future earning potential. With this method of determining the value of the business for property division, it can be costly to buy out your spouse, even if the business is new.
2. Financial Implications
Of course, starting a business can also impact spousal support and child support calculations, especially if the business is turning a profit or you’re paying yourself from the new company. The income generated from the business can affect the determination of these financial obligations, potentially increasing your obligation to your spouse or reducing their obligation to you.
Due to the unique situations of each family, it’s important to consult an attorney and a financial advisor to navigate these complex financial considerations.
3. Business Ownership and Control
During the divorce proceedings, the business may be subject to evaluation, scrutiny, and even potential interference from the spouse. This can present potential challenges in maintaining sole ownership and control of the business or may cause additional delays (and costs) during divorce proceedings.
4. Disclosure and Transparency
Notably, there are serious potential consequences of hiding or undervaluing the business during the divorce proceedings. Lying during divorce proceedings is illegal. It’s essential to have full disclosure and transparency when starting a business before the divorce is finalized.
To maintain ethical practices and legal obligations during this period, speak with a lawyer to ensure you meet all transparency and disclosure requirements. Note that in many states, a business you start after filing for divorce won’t be considered in divorce proceedings, but it’s still essential to disclose the business.
5. Considerations for Non-Entrepreneurial Spouses
When you form a business while married, non-entrepreneurial spouses will still have the right to start the business during divorce. However, the challenges faced by non-entrepreneurial spouses during divorce prove any work they did for the company is in a non-official capacity.
Non-entrepreneurial spouses have potential rights and entitlements based on their involvement in the business during the divorce process. To protect a non-entrepreneurial spouse’s interests and rights, you’ll want to speak with a divorce lawyer to understand your interests and your spouse’s rights.
How to Protect Your Business Startup in Advance?
The best way to protect your business in the case of divorce or alternative dispute resolution is to be proactive. If you own a business before getting married, you can consider options like a prenuptial agreement or postnuptial agreement to protect your business and its future growth. Consider also a married couple LLC or Wyoming LLC along with the options below.
1. Prenuptial Agreement
A prenuptial agreement protects the assets or business interests you bring into a marriage in case of divorce. It must be signed before the marriage. For example, a prenup can protect a family business’s income, resources, and assets.
This agreement can prevent a non-owner spouse from accessing the business finances, acquiring ownership, or obtaining a support award based on the business income. Setting up a prenuptial agreement can help your business survive during and after the divorce.
2. Postnuptial Agreement
If you didn’t create a prenuptial agreement, you can still create a postnuptial agreement. A postnuptial agreement is created by spouses after getting married. This legal document outlines ownership of financial assets in case of a divorce. A postnuptial contract may outline business responsibilities, ownership interests, and responsibilities to help a business you create together to survive during and after the divorce.
3. Buy-Sell Agreement
A buy-sell agreement outlines a plan to transfer any owner’s business interest. It can help your business survive during and after the divorce, death, retirement, disability, or any other changes in the owner’s relationship or working agreement. By laying this out before it’s needed, your business is protected, regardless of what the future brings.
4. Keeping Personal Finances Separate
Of course, you can keep personal and business finances separate. This can simplify divorce proceedings and create a clearer delineation between shared and business assets. Of course, if you form the business after you file for divorce, keeping the business separate is even more essential.
Establish yourself as your business’s sole owner to ensure that the organizing documents specify that the business cannot be transferred in the event of a divorce.
5. Insurance Policies
While insurance policies generally will not protect the business in case of divorce, liability insurance could offer a layer of protection if the spouse tries to claim personal injury related to the business.
Protecting Your New Business
Whether you form the business while the divorce is in process or wait until the divorce is finalized, whenever you’re ready to start a business, doola can help. doola business formation services can help you form an LLC in all 50 states. Get support with compliance, obtaining an EIN, and opening a business bank account. Get started with doola now!
Should I consult a lawyer before starting a business during the divorce?
Yes, you should consult a lawyer or a law firm before starting a business during a divorce.
Can starting a business impact child custody arrangements?
Yes, starting a business can impact child custody arrangements. You can speak with a lawyer to understand the potential impacts of your situation.
Can my spouse claim a share of the business’s future profits?
Yes! Depending on the structure of the business, your spouse may have a right to both a fair valuation of the business and a stake in its future earnings.
Can my spouse take control of or manage my business?
Yes, your spouse could take control of or manage your business, depending on how you’ve set it up. Speak with a lawyer or consider a business structure with your spouse and whether you want the spouse to have active involvement in the business.
Is it recommended to delay starting a business until after the divorce?
Delaying starting a business until after the divorce can ensure that you remain the business’s sole owner. Starting a business during your divorce can lead to additional financial or legal considerations. More on that is discussed above.