By Lee Sherman
If your life partner is also your business partner, you may be wondering how this can affect your finances should things go wrong. Like any relationship, it’s complicated.
While there’s less risk of you falling out with your spouse than there would be if your partners were relatively unknown to you, you still want to plan for this scenario. While we’ve all heard stories of the generous pre-nuptial agreements that are signed when a high-net worth individual marries someone who has less money, owning a business together makes it harder to separate one person’s money from the other.
For high-net-worth couples, who want to take steps to protect their individual assets, it’s important to define what is considered income. It isn’t as straightforward as it may appear. A person’s contribution to a business is an important factor in the success of a business but it may be hard to actually quantify that in dollars.
Where does the money come from?
Experts suggest starting by separating the different forms your income can take. It seems clear that your salary (if in fact you take one) is income, as is money that comes in from a family trust, an inheritance, or a gift. You’ll want to protect any family income. If you are personally responsible for the company’s bottom line (for example, if you’re a CEO that must answer to the board of directors) you should get credit for a companies growth as well as blame when things go south. But what of the more intangible contributions to a business? Perhaps you lead the marketing team and have built a strong, recognizable brand. Roles and responsibilities are often reflected in a company’s cap table and that will play a critical role in dividing the spoils when a business is sold or fails.
Stock is considered income and how much stock each party gets is mostly decided up-front upon the formation of the company. In the case of a high-net-worth marriage like the one between Amazon founder and CEO Jeff Bezos and his wife and early Amazon employee MacKenzie, there was no prenuptial agreement in place and she only received 25% of Amazon stock despite being, by all accounts a key player in Amazon’s early days, credited with coming up with the name, business plan, accounts and shipping early orders as well as negotiating the company’s first freight contract. Don’t cry for MacKenzie. though. That Amazon stake came to $35.6 billion, making her the third wealthiest woman in the world at the time of their divorce in 2019.
Protecting retirement savings
Be sure to ask your financial advisor about how pre-nups, power of attorney, or community property will affect the business. Depending on how established your business is, you may not receive a market-rate salary (if you have a salary at all) and it may be awhile before your company offers 401(k) matching or other benefits that contribute to your retirement savings.
Since you and your spouse are putting all of your (nest) eggs into the same basket, should the company fail, there is a much higher risk of you losing both incomes on the exact same day, without anything to fall back on. On the other hand, if the business is a success and is able to go through an IPO or is sold to another company, both of you will receive a huge payout commensurate with your stake in the company.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.