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What can happen if your business partner divorces?

You're not getting a divorce, but your business partner is.

You two own your business 50-50. You never invited their spouse into the business, but you still might wind up with a new partner.

After all, in a community property state such as California, what belongs to one spouse belongs to the other. Businesses are considered marital assets and must be divided in the case of divorce unless certain steps were taken in advance.

So, just what will happen?

  1. Your partner could share their interest in the company with their soon-to-be ex. So, you still will own your 50 percent share, but your partner and the ex each could have 25 percent. Therefore, you now could have a 25 percent partner who knows nothing about your business.
  2. Your business probably needs to be valued to see what it's worth. That means you'll need to open your books to a third party, and your employees may get dragged into the process.
  3. Your partner could get so bogged down in the divorce that the business gets put on the back burner, and that could affect your bottom line. Or, the partner might even go so far as to take an action that makes the company less profitable at the time of valuation so that the ex will receive less money.

How could this situation have been avoided?

When two - or more - people join to form a business, each partner could create a prenuptial or postnuptial agreement designating the business as a separate entity and not a marital asset. This condition can be written into any corporate bylaws so that any future partners must take the same step.

Additionally, your formation documents can include a stipulation that a partner's share in the company can't be transferred to an ex-spouse without the approval of all partners. Instead, the business can have a buy-sell provision that requires partners must sell their ownership interest back to the company instead.

These are just a couple of ideas of how to keep an ex-spouse from joining your business. An attorney with experience in business formation can offer additional information.

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