United States: So, You And Your Spouse Or Business Partner Are Parting Ways?

Last Updated: July 21 2015
Article by Edward S. Dratch

Business co-ownerships are very similar to marriages. Too often, people drift apart, change ideals, decide to alter their lifestyles, or even worse for one reason or another, cheat on their business or marital partner(s).

In the beginning of a relationship, all parties are many times overly optimistic with respect to their anticipation of the future. I have yet to meet a person who enters into a business relationship thinking the situation will not work out. Similarly, there are very few men or women who enter into marriage anticipating the relationship will not continue to be totally blissful. However, as we all are well aware, things do not always turn out the way we expect or may like.

In both business and marital situations, proper planning can help avoid the pitfalls of business owner disputes and matrimonial litigation. In both cases, when one or some of the people involved change their philosophy or outlook, the result can cause a change in morals, character, goals, and feelings of entitlement.

Protect your company

In the business world, every business relationship should be defined by a written agreement delineating each owner's responsibility, authority, and job description. These contracts must be specific and stipulate how a situation is to be handled when disagreements arise. The people involved will have to seek professional guidance from attorneys and accountants who are familiar with the specific industry and have experience in settling disputes. In the absence of a written agreement, the differences will very often lead to extensive and expensive litigation and professional/expert fees. A considerable amount of aggravation, negotiations, and disruption of the business, resulting in lost profits, can be avoided if the proper planning had been done when "everybody was friends" at the onset of the relationship.

Family ties

The foregoing is true whether the parties are related or not. In fact, there are many situations where a family business needs these contracts even more than when the parties are not related. In a family business, sibling rivalry exists very often and feelings which have festered for years can cause unwarranted and unnecessary arguments. I have seen many second and third generation businesses destroyed due to sibling rivalry or cousins who have been unwillingly put together in a business relationship because of their parents. These successful businesses, many built over several generations, can be ruined in a relatively short period due to familial disputes which may be totally unfounded. A shareholders,' partnership or operating agreement cannot only avoid this from occurring, but can provide provisions for succession planning, so the company will successfully continue in existence for generations to come.

Love and marriage ...

With respect to a marital relationship, the foregoing holds true as well. The agreement used in a marital situation is referred to as a pre-nuptial agreement, if entered into before marriage, or a post-nuptial agreement if entered after the marriage has begun. Although there is much case law on matrimonial litigation, the process of divorce can be lengthy and very costly. In addition, in a "business divorce" the main focus is finances. In a matrimonial action, finances can very often be overshadowed by custody issues. Custody litigation is fraught with emotion and the issues are, many times, not viewed objectively. As to the financial aspects of divorce, the two issues are support and the division of assets. With regard to support issues, these can apply to the lesser earning spouse and/or the handicapped or not yet emancipated children of the marriage. The support for the lesser earning spouse is referred to as alimony and the support for the children is referred to as child support.

Each of the support components is treated entirely differently for tax purposes. Alimony is tax deductible to the payor spouse and taxable to the payee spouse. Child support is non-deductible to the payor spouse and non-taxable to the payee spouse. Accordingly, these items can entail much litigation before the parties come to an agreement - if they can come to an agreement. In the event they cannot agree, the Court will determine the matter based on the facts, circumstances, and the parties' lifestyle. In addition, the length or term of payments will vary depending upon the circumstances and the negotiations between the parties.

As to the division of marital assets, this is referred to as equitable distribution. Equitable does not mean an equal division, but a division based on what is considered fair; once again predicated on the facts and circumstances. New Jersey, as do many other states, excludes certain assets from the marital estate for equitable distribution. These are referred to as exempt assets, which are acquired prior to the marriage and during the marriage by gift or bequest which have not been put into joint name. This is a simplification of the law for illustrative purposes as there are many conditions which have to be considered in determining the exempt portion of an asset.

Thinking ahead can save you later

In summary, these situations, which could potentially cause costly litigation, can be avoided by proper and timely planning. Before individuals enter into a legally binding business or personal relationship, they should consult with their professional advisors (accountant or attorney) to see what agreements, if any, can and should be prepared and what terms those agreements should contain. A well-planned agreement can help avoid costly litigation and the complete termination of personal and familial relationships which took years, and even generations, to establish.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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