Saturday, July 28, 2007

Doing business with your spouse

Do any of these remind you of yourself?

  1. You want to take your spouse into the business?
  2. Or you have a business, maybe at home, and your spouse is just helping out?
  3. Or are the two of you are thinking of starting a business together?
I suggest - strongly - under any of these scenarios that you get yourself to an attorney now.

Why? Take the second scenario first because it hides its problems like a snake in the grass. You may not know that the law can imply partnerships by actions as well as by a formal agreement. Two spouses start a business and even without a formal agreement, a partnership can be created by their acts. I willingly admit to an aversion against partnerships. I think most attorneys do not like them. Law school beats us over the head to avoid liability for our clients as much as possible. If anything goes wrong with a partnership, then business creditors can go after all the joint assets. Since most businesses fail, why would you not be talking to a lawyer before problems start?

The other two scenario at least get the horse before the cart. The first scenario might only require tinkering with the business format and maybe a prenuptial agreement or a post-nuptial agreement while the third does require advising on the business format (corporation, limited liability company or partnership) and a post-nuptial agreement.

Why a prenuptial/post-nuptial agreement? If the clients want to keep the business running as long as possible, they need to consider all of the problems including divorce. I think this kind of l agreement needs to be considered regardless of the business type used by the husband and wife. With a partnership and limited liability company having a written document (and a LLC requiring a written operating agreement) setting out how the business shall be run, incorporating some of the prenuptial/post-nuptial's terms does not seem out of place. Based upon that reasoning, they need a separate prenuptial/post-nuptial agreement if the business is to be set up as a corporation.

Then they need to consider their retirement and estate planning objectives. If the business entity is a partnership or a limited liability company, these objectives need expression in the partnership agreement or the LLC operating agreement and for corporations in a separate document.


Anonymous said...

As usual, Sam makes an excellent point about the pitfalls of being in business with your spouse. I have had divorce cases myself where we got into major battles over a business that was really created and run by one party, but the other party wanted a share at the time of divorce. This is good, thoughtful advice.

Sam Hasler said...

Thanks. I try - even when things get a bit out of hand and I do not post as often as usual.