Closely-held corporations, partnerships, and LLCs often require shareholders and partners to provide the business with a prenuptial agreement. Businesses are incredibly valuable financial assets and dividing them under a divorce can be exceedingly complicated and expensive. These mandatory prenuptial agreements are used to protect the operations of the business from the personal issues of its individual shareholders or partners.
Divorce and business do not mix
Businesses are run by people, and they thrive based on a complex mixture of personalities. That is why the introduction of new shareholders or partners in closely-run businesses often brings consternation and fear.
Divorces are a common issue with which many closely-held corporations are forced to address. Divorces introduce unknown variables into the operations of business. For example, a divorce could add a new partner or shareholder to the company because the ex-spouse obtained an interest in the firm as part of the divorce. The practical effect is to force the other company members into an unwanted contract with an unknown person.
In response to the uncertainty brought by a divorce, many of these small businesses now require investors and managers to sign lock-out or buy-sell agreements to protect the company.
Methods to protect the business
Some closely-held corporations require unmarried shareholders or partners to sign prenuptial agreements and to furnish a copy with the firm. Furthermore, these companies often require the shareholder’s spouse to provide a waiver of future interest in the business.
Another common technique is the buy-sell agreement. Buy-sell agreements prohibit the transfer of shares without the approval of other partners or shareholders and bestow the right (not obligation) on the shareholders to purchase shares from one or both of the divorcing parties. The goal is to allow the original business owners to maintain control of the company.
Requirements for a valid prenuptial agreement
A prenuptial agreement is a pre-marital agreement that assigns rights and responsibility between the couple. It can do anything from assign support obligations to divide up property in the event of a divorce.
To be valid, divorce agreements must:
- Be in writing;
- Contain a full disclosure of all assets;
- Be executed voluntarily and without coercion;
- Fair; and
- Executed by both parties in front of witnesses or a notary.
Many, if not all, prenuptial agreements are challenged by one or both spouses. However, if all of these factors are met, the prenuptial agreement will be upheld as valid.