The Role of Divorce in Partnership Agreements

The Role of Divorce in Partnership Agreements

TIn a previous post I talked about issues related to the death of a partner and the difficulties that can surface if the partners have not discussed a business succession plan at any point. Today’s post is also somewhat morbid. This time we are talking about divorce. 

Many partnerships are formed while partners are married. As a general rule (though not always applicable in every state), property acquired during a marriage is treated as marital property. So, a business that is acquired or formed during the marriage would be considered marital property (although not all businesses would qualify as marital property—it is a complicated matter). If a divorce occurs, that marital property is part of a property settlement order between the now former spouses. Today we will look at how a business gets allocated in this process.

In a corporation this property allocated by stock. If one of the stockholders has 40% of the business and they get divorced, then typically the former spouse will receive 20% of the business. As much as your partners may enjoy the social company of your spouse, they might not want to be in business with your spouse.

So how do businesses address potential circumstances of partner divorces?

One of the most common ways is to have an understanding with the spouses of the partners. If there is a divorce, then the spouse agrees that either the divorcing partner or the business may buy the share of business that they should receive in any type of property settlement. The easiest way to handle things would also have an agreement between the spouses that re-allocates different assets into different pots. Perhaps the divorcing partner gets to maintain control of the business, but in return gives other assets to the spouse.

The spousal consent is a touchy situation. If the partnership in particular is doing well financially, that financial support may be the primary way of supporting the family. If there is a dissolution of the marriage, that the value of that partnership can be quite high. The price of acquiring the value of the former spouse’s share of the business could be quite high. This is a function that has to be planned and managed both by the partnership, the business itself, and the spouses within the business.

It is not the easiest conversation to have. The partners themselves might be able to have the conversation guided by an attorney, but that conversation alongside the spouses is often very fraught with fear, emotion, and concern whether or not one is contemplating divorce. As uncomfortable a conversation this topic might be, talking about the consequences of a divorce must be addressed during the creation of the business and the writing of a partnership agreement.