Starting a New Business in the Middle of Divorce
"My wife and I started a business a couple of years ago. We formed a limited liability company (LLC) to run the business and split the ownership (and the work) 50-50.
My wife and I are currently in the process of divorcing. We have agreed to continue running the business as joint owners (frankly, we both need the income), but unbeknownst to my wife I have been meeting with an extremely wealthy angel investor in our community. This person loves our business and has offered to help me expand to multiple locations. He is aware my wife and I are divorcing and has made it clear he doesn't want to work with anyone but me as his business partner.
Is there any way I can work with this person without my soon-to-be ex-wife getting a piece of all the new business?"
This is a tough question, and the answer will depend a lot on the divorce laws of your state, which generally fall into three groups.
A shrinking minority of states are "title" states. In these states, whoever owns title to an asset gets that asset in the divorce settlement. You and your investor would simply have to form a new corporation or LLC for each new business location without your ex-wife's participation, and she would not be entitled to receive anything from the new business locations.
Some other states, especially in the southwestern United States, are "community property" states. In these states, all "marital property" (assets acquired during the marriage) is considered owned 50-50 by the two spouses. If you live in a "community property" state, you will need to ask your lawyer when a marriage is considered to "end" legally for purposes of determining "community property" -- when the initial divorce petition is filed, or when a final decree of divorce is issued?
The third and fastest-growing group are "equitable distribution" states. In these states, including most states in the northeastern United States, assets acquired during the marriage are put into a "pool", regardless of who owns legal title to them. If the parties to the divorce can't agree on how these assets should be distributed, the judge presiding over the case has broad discretionary authority to divide them any way he or she sees fit in an effort to achieve the fairest possible outcome (the most "equitable" distribution, hence the name).
In an "equitable distribution" state, you still have the issue of whether an asset acquired after a divorce action has begun but before a final decree has been issued is "marital property." But because of the broad powers judges are given in "equitable distribution" states, the judge possibly could extend the period for "marital property" even beyond the legal dissolution date if, in his or her judgment, your new business is a continuation or extension of an asset that was created during the marriage.
That is a serious concern in this situation. A judge sympathetic to your wife could find that the "intellectual property" relating to this business (such as the business name and trade secrets) was developed by the two of you jointly during the marriage and is therefore "marital property," entitling your ex-wife to a piece of any income you create using that intellectual property even long after the divorce is final.
It's a very tricky question and should not be dealt with without some expert advice on the matrimonial laws of your state. Assuming the law in this situation isn't clear (as is likely), here are some practical suggestions for how you may be able to move forward with this business.
First, if you are financially able to do so, you should consider making an offer to purchase your wife's share of the existing business, giving you sole ownership and control over its future growth. You probably will have to give up some heavy-duty assets, such as your house and investment portfolio, and you should consider carefully how long it will take to make up for these losses from the business's projected revenue growth.
Second, you should consider making full disclosure to your wife about your relationship with the new investor and your plans to expand the business. While your wife will almost certainly begin by asking for half of all new business, once you explain that the new investor wants to work with you alone, she may be willing to accept a much smaller royalty, or percentage of all future sales from the new business operations, as a compromise settlement.
If your wife will not accept any sort of compromise, make sure your investor owns a majority share of each new corporation or LLC you form for this business. That way, if your ex-wife does seek to attach your interest in the business, it will not technically be "your" business, and she will be able to obtain only a piece of your piece of each new company, without any significant role in managing or running the business.
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.