Should I Require My Business Partners to Get a Property or Prenuptial Agreement?

Let's be honest, prenuptial agreements have a bad rap. The most common attitude toward these sorts of property agreements is that they are effectively nothing short of planning to get a divorce at some time in the future. They are often viewed as unfair toward the disadvantaged spouse and cruel and selfish in nature. But is that really the case? If we are talking about some super wealthy tycoon and the brand new trophy spouse, well maybe that's exactly what a prenup would be. But in a business context, a property agreement that shelters the other owners from being forced into partnership with someone who is an outsider might be a more reasonable and responsible use.

When you cut the cake, don't cut your partners!

Let's examine a very common scenario: Three dentists decide to combine their practices so that each has more ability to schedule vacations, work around illness and otherwise spread the responsibility away from just themselves. They form a corporate entity, build a larger building, hire additional staff, and construct a shared operating theatre. Everything is going well, until Dentist A becomes embroiled in a divorce action. Dentist A's interest in the corporation is her largest asset because it provides her income, involves ownership in stock and physical assets such as the building as well as her retirement plans, etc. Her spouse wants his share of all that. As the divorce proceeding progresses, Dentist B and C face the possibility of being forced into business with a non-dentist who will want his share cashed out with obvious consequences for the practice...

Agreements generally work between equal partners but not their uninvolved "successors..."

 First, not all agreements of this sort must be entered into prior to marriage. Property agreements, in general, may be entered into at any time and by any participants. Prenuptial agreements are specifically entered into prior to a legal marriage. Post Nuptial agreements may be entered into after marriage. Property agreements may be entered into by any combination of participants and at virtually any time so long as the agreement is for a legitimate business purpose and won't constitute an attempt to circumvent a lawful debt or otherwise defraud someone or something else.

For example: Bob and Jane offer to fund their son's antique shop start-up. They know their son is engaged. They, reasonably, want a prenuptial agreement to protect not only their son's interest in the start-up but also theirs! They don't want to put up several hundred thousand dollars to fund a future split with an angry ex-spouse.

Well, there goes our nest egg!

Second, there's a general misunderstanding about property agreements. It is that property agreement separate "all property" between the participants into his and hers forever. That is simply not the case. Well prepared property agreements designate certain property between the participants at the outset and down the road. Additionally, there are several nuances regarding the revenue or assets that flow from separate property that must be accounted for...such as:

1. Does income from a separate asset remain separate?

2. If income from a separate asset is used for a shared asset like a house, does it affect the character of the separate asset or just the income that was shared?

3. If income or assets from separate property begin generating their own income, is that still separate? What if it's used to benefit the "community" rather than just kept separate?

4. What about debt or other liabilities? Are they solely the responsibility of the separate property owner? If other participants contribute to the growth or maintenance of the separate asset, does it change its character?

5. What if the asset gets titled in both participants' names? Does that overcome the property agreement? What if it is placed in a common trust instrument? What if it's in a shared estate?

6. How would the asset be treated in a bankruptcy or dissolution (divorce) action?

7. Would criminal activity disannul the property agreement?

8. Etc.

This isn't just planning for you...it's also planning for your business associates.

In conclusion, it's reasonable and prudent to have a separate property agreement when entering into a business arrangement. This does not mean that it's a plan for divorce. Instead, it's protection and clarity for the other partners, shareholders, investors and contractors that are engaged with the business. Few things are more disruptive to an active business than an immediate demand for a cash-out, or a court-ordered change in ownership that is not agreed to by the other owners. You can protect against this sort of nightmare by requiring the necessary documentation at or after formation.

I encourage you to be cautious to not accidently violate the laws of your jurisdiction by separating property improperly. Get experienced counsel to assist in preparing property agreements that are focused, reasonable, legal and forward-looking.

Curry Andrews, Attorney