Business Owners Should Consider a Prenuptial Agreement to address Sales Proceeds and Equity Based Compensation by Margaret G. Kubicki For individuals who own a family business or are owners of a closely held business, entering into a prenuptial agreement is a strategic way to protect their interests and ensure clarity regarding the treatment of business assets in the event of divorce. A prenuptial agreement allows business owners to proactively address how proceeds from the sale of the business and equity-based compensation will be classified and divided, reducing the risk of future disputes. A primary concern for business owners is whether proceeds from the sale of the business will be considered separate property (belonging solely to the owner) or marital property (subject to division). A prenuptial agreement could clearly state that any proceeds from the sale of the business during the marriage will remain the separate property of the original owner. This is especially important if the business was established before marriage or inherited from family members. Alternatively, if both spouses contribute to the business, the agreement can specify how much of the proceeds, if any, should be treated as marital property and how the proceeds will be divided. Many closely held businesses compensate owners with stock options, restricted stock units, or profit interests. Without a prenuptial agreement, these assets may be subject to division as marital property, especially if they are earned or vest during the marriage. A prenuptial agreement can specify whether equity-based compensation will be treated as separate or marital property, and how any appreciation or income derived from them will be handled. Addressing these issues in the Prenuptial Agreement is equally important to the spouse of a business owner to ensure that there are other means of protection if the business, equity-based compensation, or sales proceeds are not marital property. Prenuptial Agreements do not only address how assets are divided upon divorce. The Prenuptial Agreement can provide financial protection for a surviving spouse who may be restricted from receiving the deceased spouse’s business interest. The company’s buy-sell or ownership agreements should be considered to ensure that the obligations under a prenuptial agreement do not violate company transferability restrictions. In the case of a second marriage, a prenuptial agreement should ensure that a surviving spouse waives any state elective rights to the business or sales proceeds intended to be left to the business owner’s descendants. For anyone with a family business or closely held business interests, a carefully drafted prenuptial agreement is a vital tool for safeguarding business assets, including sale proceeds and stock options. By clearly defining what is separate and what is marital property, business owners and their spouses can minimize uncertainty, protect their legacy, and ensure their intentions are respected. 4922-9035-7840, v. 1