Succeeding in Your Business: The pitfalls of starting a new business in the middle of a 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 ... 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 depends 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 holds the title of an asset gets that asset in the divorce settlement. In a title state, 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 by the two spouses 50-50. 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 is 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 divorce parties 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 is marital property if acquired after a divorce action but before a final decree. But because of the broad powers judges are given in equitable-distribution states, the judge could possibly 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, 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 will probably have to give up some heavy-duty assets, such as your house and investment portfolio, to get this and you should consider carefully how long it will take to make up for these losses with 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 a percentage of all future sales from the new business operations, as a compromise.

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. That way, if your ex-wife does seek to attack your interest in the business, it will not technically be your business and she will only be able to obtain a piece of your piece of each new company without any significant role in managing or running the business.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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