Can a prenup protect a business?
Owning a business before marriage does not by itself keep the business separate. What happens to its growth, its earnings, and the owner's work during the marriage is where the outcome is decided.
A California prenuptial agreement can confirm that a business owned before marriage remains separate property, but ownership alone does not settle the question. Because a founder's work during the marriage is community effort applied to a separate-property asset, agreements typically also address appreciation in value, retained earnings, distributions, a reasonable salary for the owner's services, and reimbursement where marital funds are contributed.
The problem an agreement solves
A business owned before marriage generally begins as separate property. But a founder who works in that business during the marriage is contributing community effort to a separate-property asset, and California has long-standing methods for apportioning the resulting growth between the community and the separate estate.
Without an agreement, that apportionment is decided after the fact, using valuations and characterizations produced during a dispute. A prenuptial agreement lets the parties decide the rule in advance, when they are cooperating.
Provisions commonly used
- Confirming the business, and any entity that succeeds it, as separate property
- Addressing appreciation in value during the marriage
- Addressing retained earnings and distributions
- Setting a reasonable salary for the owner's services
- Addressing capital contributions from marital funds
- Addressing new entities, subsidiaries, and successor interests
- Addressing reimbursement where community funds are used
- Coordinating with operating agreements and buy-sell provisions
The salary provision deserves particular attention. Where an owner takes little or no compensation and the business grows, the community may have a claim to the growth attributable to that uncompensated work.
Why other owners care
A business with partners or investors has its own reasons to want the question settled. An ownership interest that becomes the subject of a marital dispute can disrupt governance, trigger transfer restrictions, or require a valuation the company would rather not undergo.
Operating agreements sometimes require owners to obtain a marital agreement, or to obtain a spousal consent, for exactly this reason. Where such a requirement exists, the prenuptial agreement and the company documents should be read together.
Primary sources
This article provides general information about California law and does not constitute legal advice. Every matter depends on its own facts. Consult an attorney about your circumstances.
Frequently asked questions
Can a prenuptial agreement protect a business in California?
It can confirm the business as separate property and set rules for its growth, but the protection depends on the drafting. Appreciation during marriage, retained earnings, the owner's compensation, and contributions of marital funds all need to be addressed.
What happens to a business started during the marriage?
A business founded during marriage generally begins as community property. Parties who want a different result usually address it in a prenuptial agreement before marriage or a postnuptial agreement afterward.
Why do business partners care about an owner's prenup?
An ownership interest caught in a marital dispute can disrupt governance, trigger transfer restrictions, or force a company valuation. Operating agreements sometimes require owners to obtain a marital agreement or spousal consent for that reason.