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Whose Divorce Is It Anyway? When Your Business Partner’s Divorce Seems Like Your Own

Chantale Suttle • September 13, 2022
A sad, worried face is drawn onto an egg sitting alone.

You may think your marriage will last forever. But do you have the same faith in your business partner’s marriage? If your partner’s divorce gets ugly, it can cost your business money and cause the disclosure of confidential business information. At a minimum, if your partner owns thirty percent or more of the company, he or she will be required to provide the court with a financial affidavit and general statement of the company’s market value. Your company will be forced to turn over its tax returns and bank statements for the last three years as evidence of your partner’s income—but a court can require so much more. 


INTRUSION INTO YOUR BUSINESS TO DETERMINE INCOME AND SET SUPPORT


Florida courts worry that shareholder-spouses will stop their privately held companies from making distributions in order to reduce their income, and as a result, reduce their alimony or child support obligations. Shareholder-spouses must therefore prove that their companies are retaining money only for corporate purposes, and not to shield money from non-owner spouses. Ordinarily, an accuser has the burden of proving a wrongdoing. But in a divorce case, the shareholder-spouse has the burden and expense of proving that the company did nothing wrong. The Florida Supreme Court placed this unusual burden on shareholder-spouses in the Zold v. Zold case.


In Zold, the shareholder-spouse complied with tax laws and claimed pass-through income from his S corporation on his tax return, even though the company never actually distributed the pass-through funds. The company retained the funds in corporate accounts. The Florida Supreme Court held that such undistributed pass-through funds are income for the purpose of calculating alimony and child support, unless the shareholder-spouse can prove that the company is retaining the funds only for corporate purposes. Since the Zold case, Florida courts have applied the same approach to undistributed funds for all types of corporate entities—S Corp or not. These disputes inevitably lead to a company retaining its own attorney and accountant to defend the company against overly-aggressive attorneys who try to pressure the shareholder-spouse by digging into private company records, and making life as difficult as possible for the company and its other owners.


INTRUSION INTO YOUR BUSINESS TO VALUE AND DIVIDE IT


If a spouse claims that he or she owns part of your business, or that he or she is entitled to share in another’s ownership interest, that claim will trigger additional corporate disclosure obligations. In both ownership and retained income disputes, everything that may be relevant to valuation or true income will be fair game. Court orders keeping this information confidential or under seal are very difficult to obtain. Here are just a few examples of what your company may be required to disclose:

1.           Profit and loss statements, balance sheets; and other financial statements;

2.           Patents, trade secrets and other valuable intellectual property information;

3.           Contracts, leads, projections, and price lists;

4.           Unannounced acquisition and merger plans; and

5.           Pending suits and noncompliance with regulatory agencies/laws.


THE RISKS


In a best case scenario, your company will be forced to give the non-owner spouse’s attorney stacks of confidential financial and business information, at the company’s cost. In a worse-case scenario, a vindictive spouse will demand the depositions of the other shareholders and will issue subpoenas to your company’s major vendors and customers. But a vindictive spouse is not the only thing to fear.


A competitor can take advantage of the transparent and public nature of the divorce process, obtain the confidential information, and use it to sabotage your company in the marketplace. In addition, valued customers or vendors may learn information about your business that makes them feel insecure or threatened. The damage may linger for years. For example, statements made in a divorce regarding the company’s value (using legitimate methods to establish a lower value) may be inconsistent with later valuations for corporate purposes such as obtaining a loan (using legitimate methods to establish a higher value), rendering any reported valuation unreliable in a third-party’s eyes.


THE SOLUTION


A well drafted prenuptial or postnuptial agreement can render much of the most intrusive and damaging financial and corporate disclosures unnecessary in the event of an ugly divorce. They can also reallocate some of the financial burden. Your company bylaws should require that all shareholders get a prenuptial or postnuptial agreement that limits the business valuation process and addresses confidentiality issues. These agreements can insulate and protect the business by mandating that the shareholder-spouse, or the nonowner- spouse, are responsible for the company’s divorce-related attorneys and accounting fees. They can also give shareholders the right to buyout a divorcing shareholder’s interests, if the divorce proceedings present a threat to corporate control.


These are just a few examples of suggested prenuptial and postnuptial agreement terms that companies should require of their shareholders who marry or are married. A divorce attorney with experience representing small businesses can customize further protections to meet the unique needs of your company. 

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By 7107328235 March 27, 2025
A prenuptial or postnuptial agreement can save your business. Consider two dry cleaners, Ricky and Fred. Both thought they would be married to their wives until “death do they part.” Unfortunately, they both ended up divorced. Ricky walked out of divorce court personally and professionally ruined. Fred, while emotionally drained, was able to maintain and grow his successful business. Why the different outcomes? Ricky’s Story Ricky owned a dry cleaning business with Lucy, his wife of 19 years. Ricky was in charge of all aspects of the business, but Lucy did manage the company’s payroll and vendors part-time. Occasionally, she worked the front counter. For the most part, Lucy raised the children and cared for her elderly parents. When they decided to divorce, Ricky and Lucy were still civil and wanted their divorce to be amicable. Ricky and Lucy worked together, without lawyers, to craft a plan for sharing time with their teenage sons, and for sharing the family’s expenses. They also agreed to sell their house after their youngest son graduated high school. After a few months, and at the urging of a well-intentioned friend, Lucy hired a lawyer to write up the couples’ plan. Lucy’s main goal was to make sure the divorce ended fairly for her children. The lawyer, however, believed that since any small business owner could hide income, assets, or a company’s true value, then Ricky must be doing that too. Even though Lucy had a base of knowledge of the business’s finances, she trusted her lawyer and figured that he knew better. So, she agreed to his “scorched earth” strategy to protect her children. What is a “scorched earth strategy”? This is a common tactic to squeeze a business owner into a large and early settlement. The lawyer hires an accountant, and they go after every scrap of information and document pertaining to the company’s assets and liabilities, and they question it all—every argument and angle of attack is fair game. Much of the cost of providing the information and documents, and defending business decisions, must be paid by the business. Scared and desperate, Ricky lawyered up too. Unfortunately, Ricky’s lawyer couldn’t advise him on the settlement terms proposed by Lucy’s lawyer without conducting his own analysis of the company’s voluminous records. Much of the paper work involved in operating a dry cleaning business was foreign to him, and the stringent environmental regulations and reporting was overwhelming. Ricky’s lawyer had to hire his own accountant to help value the business for the divorce. Ricky and Lucy were now far from civil with one another, and the mud began to fly. Faced with dueling accountants, complicated and conflicting arguments about the business’s finances and value, and accusations against Ricky of financial wrongdoing, the family court judge appointed an independent forensic accountant to advise the court. The independent accountant saw that the business, which was the couple’s biggest asset, was crumbling because the ugly divorce was keeping Ricky from focusing on the business. The accountant was also worried about the accusations of financial wrongdoing by Ricky. So, on the independent accountant’s recommendation, the court appointed a receiver to operate and protect the dry cleaning business. Ricky and Lucy were now paying six different professionals, and trial was still months away. The receiver discovered that the company’s records did not comply with dry cleaning waste disposal regulations, and reported the non-compliance to government authorities. Ricky and Lucy blamed each other for the missing paperwork, and the sour relationship between them stalled and ultimately prevented joint efforts at an amnesty program and damage control. The business began to accrue daily statutory fines, employees were laid off, debts mounted, and the business eventually shut its doors while Ricky and Lucy continued to fight in divorce court. A year later, with no business to provide income for Ricky or Lucy, Ricky agreed to settle by paying Lucy more than half of his share of the house. Lucy accepted the offer, even though it was smaller then what she expected originally, because her share of the house was pledged to pay her lawyer’s fees. Fred’s Story Fred was married to Ethel for 22 years, and they have a daughter. Like Ricky and Lucy, Fred ran the business while Ethel was involved part-time in just certain aspects. But unlike Ricky and Lucy, when Fred bought his dry cleaning business nine years earlier, Fred and Ethel signed a postnuptial agreement to protect each other in case of divorce. The attorney-drafted agreement laid out a strict structure for evaluating and dividing the business, and for determining Fred’s true income for spousal and child support calculations. It identified and limited the financial information and documents that the business would have to disclose. It also required that the couple use a single neutral accountant (who would be paid from marital property and not by the company), to gather and evaluate that financial information and documentation. Early in the divorce, Ethel agreed that the postnuptial agreement was valid. She waived any right to ask the court to force the company to disclose more information or documents than described in the postnuptial agreement. This entitled Ethel to an immediate, fair, and higher award of support, thanks to a provision that she and Fred put in the agreement to encourage a quick resolution. Within a month, Fred and Ethel’s divorce was finalized, with minimal attorneys’ and accountant fees, and with no interference or intrusion into the dry cleaning business or operations. How could two similarly situated businesses and families leave divorce court with such different results? The first story is horrifying, but exceedingly common. Many states have onerous disclosure requirements that unnecessarily burden the time and finances of a small business. Unscrupulous divorce lawyers are trained to hone in and target a business owner’s fear of having the business’s confidential and financial information exposed to the world, to induce an early and usually unfair settlement. Fair and careful divorce lawyers will also want extensive company records, because they fear being liable for giving bad advice if they make recommendations without investigating the whole picture themselves. Either way, good lawyer or a bad one, smart judge or not, a case involving a small business can be very costly. The best way to avoid being a Ricky, is to get a prenuptial or postnuptial agreement like Fred. A good prenuptial or postnuptial agreement can render the most intrusive and damaging financial disclosures unnecessary, and can limit or attribute the related costs away from the business. In some situations, as shown above, they can save the business itself. If Ricky had a prenuptial or postnuptial agreement in place, maybe a receiver would not have been necessary, and Ricky and Lucy could have resolved the business’s regulatory problems confidentially without going out of business. Ricky and Fred were not wrong to believe in their marriages. A life-long commitment is not fanciful; it is a hopeful and beautiful goal. Most couples think they will reach that goal and that other couples will fill our country’s depressing divorce statistics. But consider this, we buy life insurance, install security systems, and wear seat belts “just in case.” They give us security even if we think that odds will always be in our favor. A careful and thorough prenuptial or postnuptial agreement can provide you, your spouse, and your business with security that all will be protected in a divorce, and that years of building a life and a business will not be burned to the ground. Chantale Suttle is the Managing Attorney and Founder of DADvocacy™ Law Firm, which is headquartered in Miami, Florida. She has been in the exclusive practice of family law for over 21 years and has served countless small business owners in divorce court. Drafting prenuptial and postnuptial agreements for small business owners is her favorite work.
A couple sits on a bench as one person reaches out to the other who is turned away.
By 7107328235 January 15, 2025
Your fiancé or fiancée presented you with a prenuptial draft: will you sign it before you hear wedding bells? Now you need a review by an attorney to ensure that your assets and your future security are protected: welcome to JustPrenups' prenup review! JustPrenups now offers UPLOADR: quickly share your prenup draft easily from any device in multiples format through UPLOADR on our site - no scanning, no email. Once we receive your prenup draft, an attorney examines the prenup that you received and then meets with you for a free consultation on Zoom. We hold your document and its data in confidence, even if you don't retain us, per our ethical requirements.
A couple walks along a Florida beach by the water in sunshine.
By 7107328235 December 26, 2024
Florida is a quirky place full of contrasts, and so is its family law. In particular, recent updates to Florida family law have changed the rules for alimony in Florida prenups. If your prenuptial agreement doesn't follow these changed rules, your prenup may not be valid and enforceable; as a result, you may be facing high financial stakes in divorce litigation that may put your assets at risk.
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