Getting Married? Protect Your Business Venture With a Prenup

A prenuptial agreement (prenup) is a legal contract between prospective spouses to modify the terms of their marriage that would otherwise be governed by state law. Although a prenup does not mean completely excluding a loved one from any interest in the entrepreneurial venture, it does mean the entrepreneur is in control of how much of a stake, if any, his or her future spouse has in their business. 

Having a prenuptial agreement in place before an entrepreneur gets married is a common way to reduce risk and complications in the event of a divorce. This article discusses the importance for an entrepreneur to have a well-thought-out prenuptial agreement in place that considers the venture and its current and potential value. (Note that the advice in this article is for unmarried people; married people who are considering starting a business can explore something similar, called a post-nuptial agreement. The rules and enforceability vary from state to state. And whether it’s a post-nuptial or prenuptial, get legal help.)

INTRODUCTION

The primary goal for most entrepreneurial firms is to create and increase value.  Businesses create and increase value by increasing revenue while simultaneously managing costs and risk.  One threat facing entrepreneurs is they focus so much on increasing revenue and (to a lesser degree) managing costs that they ignore managing risk.  While risk can take on many forms, decisions made in an entrepreneur’s personal life can greatly increase risk to the firm. 

That’s why it’s important for an entrepreneur to have a well-thought-out prenup in place before getting married. This is especially important because the divorce rate in the United States is around 45% (U.S. Census Bureau, 2022) while data from the Bureau of Labor Statistics shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.

HOW A DIVORCE CAN PUT AN ENTREPRENEUR’S BUSINESS AT RISK

Being an entrepreneur is a rewarding experience, and most entrepreneurs put everything they have into seeing their business come to life and grow. However, it is also a risky endeavor. A successful entrepreneurial venture is an asset and, in many cases, can be a huge asset. However, it can often be tricky for the entrepreneur to manage their business when they have a spouse who may or may not contribute to the entrepreneurial venture (Louis, 2022). 

Because of this, entrepreneurs need to keep in mind that it’s not guaranteed that an endeavor will be successful in the future, whether that endeavor is a business or a marriage. That’s why it is wise for entrepreneurs to protect themselves before making a commitment (The Wallack Firm, P.C., 2021).  It is also important for entrepreneurs to understand that if the marriage is not successful and ends in divorce, most states give judges discretion to divide marital assets equitably, which usually involves considering the length of the marriage, the contribution to acquiring the assets, and each spouse's financial condition. Such a scenario could have a crippling effect on a business for many reasons.

WHY ENTREPRENEURS SHOULD HAVE A PRENUPTIAL AGREEMENT

Minimizing risk.  While many entrepreneurs may not be deterred by the risk of not having a prenup, minimizing the risk can make it easier to plan ahead and navigate difficult situations.  Having a prenuptial agreementThe Wallack Firm, P.C.Hughes, Massenzio& WhitakerThe Wallack Firm, P.C.The Wallack Firm, P.C.The Wallack Firm, P.C.An enforceable prenupshared debtrequire that unmarried shareholders get a prenuptial agreementFrawley & PollockFrawley & Pollockhttps://www.joleenalouislaw.com/blog/10-reasons-why-entrepreneurs-must-have-a-prenup?utm_campaign=8-reasons-why-entrepreneurs-must-have-a-prenupEntrepreneurship and the U.S. Economy (bls.gov)U.S. Marriage and Divorce Rates Declined in Last 10 Years (census.gov)https://www.wallackfirm.com/blog/2021/12/how-