After you say “I do,” you and your spouse become business partners for life. That doesn’t mean that you have to go into business together. Many married couples choose to keep their business ventures separate. If you’re thinking about starting a business or already have one and are getting married, it’s essential to understand the legal implications of marriage on business ownership. Here’s what you need to know.
Community Property vs. Separate Property
In general, there are two types of property in the eyes of the law: community property and separate property. Community property is any property that belongs to both spouses equally. This includes income earned during the marriage and any property purchased with that income.
Separate property, on the other hand, is any property that belongs to only one spouse. This can include property owned before the marriage, inheritance, or gifts received during the marriage. Not only is a separate property not subject to division in a divorce, but it can also be protected from creditors of the other spouse.
Community Property States
Community property laws vary by state. There are currently nine community property states: California, Arizona, Louisiana, Idaho, Nevada, Texas, Washington, New Mexico, and Wisconsin. If you live in one of these states and are getting married (or are already married), all of your property will be considered community property unless you take specific legal steps to designate it as separate property.
You can do this by creating a prenuptial or postnuptial agreement. This legal document lists each spouse’s separate property and stipulates that any property not listed will be considered community property. If you live in a community property state and don’t have a prenuptial or postnuptial agreement, any property you acquire during your marriage will be considered community property, regardless of how it’s titled.
Businesses Are Community Property Too!
This includes businesses started before or during the marriage as well as businesses inherited during the marriage. If you start a business after marriage, it will also be considered community property unless you take specific steps to protect it. For example, if your business is organized as a sole proprietorship or partnership, your spouse will automatically become a co-owner unless you take steps to prevent it, such as creating a prenuptial agreement or entering into a postnuptial agreement.
So what does this mean for you and your spouse? First, it’s important to understand how business ownership will be affected by marriage. If you live in a community property state, any businesses you own will be considered community property unless you take specific legal steps to protect them. Secondly, if you’re considering starting a business with your spouse, it’s important to discuss your business goals and how you will work together as partners. This can help you avoid any conflict or misunderstanding down the road.
What Steps Should You Take In Case of Divorce?
If you divorce, all community property will be divided equally between you and your spouse. This includes businesses, regardless of who started them or how much each spouse contributed to the business. However, if your business is considered separate property, it will not be subject to division in a divorce.
To protect your business in the event of divorce, it’s essential to take steps to keep it separate from your spouse. This can include keeping business and personal finances separate, maintaining separate business bank accounts, and documenting each spouse’s contributions to the business. You should also have a buy-sell agreement in place that outlines what will happen to the company in the event of divorce. This can help you avoid any conflict or misunderstanding down the road.
You can also hire divorce mediation services to help you and your spouse come to an agreement about the division of your business. Mediation can be a great option if you want to avoid the cost and stress of litigation. These services can help you and your spouse to communicate openly and comes to a mutually agreeable solution.
What Happens to the Business in the Case of Death?
If one spouse dies, the business will be considered part of their estate. This means that it will go through probate and may be subject to estate taxes. To avoid this, you can create a trust that outlines how you want your business to be handled during your death.
You can also create a buy-sell agreement that stipulates what will happen to the business in the event of one spouse’s death. It’s important to discuss your business goals and objectives with your spouse so that you are on the same page. This can help you avoid any conflict or misunderstanding down the road.
The takeaway here is that if you’re thinking about starting a business or already have one and are getting married, it’s important to understand how community property laws will affect your business ownership rights. So take the necessary steps to protect your business before tying the knot!