Prenuptial agreements where one party owns a business

Owning it before the wedding is where the question starts, not where it ends

The common belief is simple: I founded this company four years before I met her, so it is mine. The first half of that is a fact about the past and nobody disputes it. The second half is a conclusion about the future, and it is the part an agreement exists to settle.

What complicates it is not ownership on the wedding day. It is everything that happens after: the work put in, the profits taken out, the money left in, the new shares issued, the second round of investment, the salary that was below market because the founder was building equity instead.

A business is not a painting hanging on a wall. It changes during the marriage, it changes because somebody works on it, and the question is what that work and that growth are.

A premarital agreement may cover each party’s rights in property, how property is bought, sold or managed, what happens to property on separation, dissolution or death, the making of a will or trust, the ownership of a life insurance death benefit, and which state’s law applies. Fam. Code, § 1612, subd. (a)

The four things an agreement actually has to decide

Stripped of language, a business clause answers four questions, and a document that answers fewer than four has left something to be argued about later.

First: what the business is on the day of the wedding. Not a valuation necessarily, but an identification, precise enough that the thing being described is not in doubt.

Second: what growth during the marriage is. This is the real fight in almost every case, and it is where an agreement earns its fee.

Third: what happens to money that comes out. Salary, distributions, dividends: where they land and what they become when they are spent on a joint life.

Fourth: what happens to the interest itself if the marriage ends. Not only who keeps it, but how the other party is dealt with if they are not keeping any of it.

Why the growth question is hard, and how agreements handle it

Suppose a company worth two hundred thousand on the wedding day is worth four million eleven years later. Some of that is the market, some is the original idea, and some is eleven years of somebody’s working life.

Untangling those after the fact is expensive and uncertain, and it is done by experts arguing about methods. The point of writing it down in advance is not that one answer is right. It is that the couple choose an answer while they are still on the same side of the table.

Agreements handle it in a handful of ways. Some treat all growth as remaining with the owner and compensate the other party elsewhere in the document. Some treat growth as shared and define how it is measured. Some take a middle road: the owner keeps the enterprise and the other party takes a defined share of the increase, or a fixed sum that steps up with the length of the marriage.

None of those is inherently better. What matters is that one of them is chosen, in terms specific enough that a reader in fifteen years can apply it.

Salary, and the trap of paying yourself too little

A founder who takes a modest salary and leaves the rest in the company feels prudent. In the context of a marriage it is a decision with a consequence, because the labour that built that retained value happened during the marriage.

The mirror image is just as common: a founder who pays themselves generously and spends it on a shared life, then argues the business itself was never touched.

Neither is wrongdoing. Both are ordinary ways of running a company, and both create a question that somebody will eventually have to answer. A clause that says what salary is and what retained earnings are removes it before it arises.

When other people own part of it

Where there are partners, co-founders or investors, the agreement stops being only about the marriage.

Operating agreements and shareholder agreements frequently contain restrictions on transfer, rights of first refusal, or provisions triggered by a divorce. An agreement between spouses that conflicts with those is a document that cannot do what it appears to do, and the conflict usually surfaces at the worst moment.

It runs the other way too. Investors and partners often want certainty that a founder’s marriage will not put an interest in play, and a premarital agreement is a normal part of answering that. Where that is the driver, the agreement is being read by people who are not in the marriage, and it should be written knowing that.

This office reads the operating documents before drafting the business clause. Where they conflict with what the couple want, that is said before the drafting rather than discovered in it.

A professional practice is a different problem again

A medical practice, a law firm, a dental surgery or an architecture studio is a business whose value is largely a person. It cannot be transferred to a spouse, its goodwill is tied up in the practitioner, and in many cases the ownership rules do not permit an outsider to hold an interest at all.

So the question is rarely who keeps the practice. It is what the other party gets instead, and how that is measured.

Practices also change character in ways ordinary businesses do not: a partner buys in, a partnership restructures, an associate becomes an owner. An agreement written for a sole practitioner who later joins a group has to cope with that, or it has to say what happens when it cannot.

What happens to a business on death, which nobody plans for

Almost every conversation about a business and a marriage is about separation. The other ending gets far less attention and arrives without warning.

An agreement may deal with what happens to property on death, and for a business owner that matters in a particular way: partners and co-owners usually have views about who they end up in business with, and a surviving spouse inheriting an interest is often the outcome nobody wanted, including the spouse.

An agreement can also record that the parties will make a will or a trust to carry out what they have agreed, which is the mechanism that makes the intention operate rather than leaving it as a statement.

This office does not prepare the estate documents as part of a premarital matter. It says where the agreement and the estate plan have to line up, so that the two are not written by different people to different assumptions.

A premarital agreement may cover each party’s rights in property, how property is bought, sold or managed, what happens to property on separation, dissolution or death, the making of a will or trust, the ownership of a life insurance death benefit, and which state’s law applies. Fam. Code, § 1612, subd. (a)

Disclosure is where business agreements most often fail

Everything above assumes the other party knows what they are agreeing about. Where the asset is a house, they usually do. Where it is a private company, they usually do not, and cannot without being told.

What each party knew when they signed is examined if an agreement is challenged, and the parts of a document that most depend on that knowledge are the parts most exposed when it turns out they were not told.

For a business that means something more than a line naming the company. It means the financial picture: what it is, what it owes, what it earns, what the owner takes out. A schedule saying "interest in Acme LLC" tells a reader nothing they could act on.

The alternative is a waiver of disclosure, in writing, made knowingly. That is available and people use it. It should be a decision taken with open eyes rather than the default because assembling the numbers was inconvenient.

This office prepares a written disclosure of each party’s property and debts and serves it before the agreement is signed. It does that because disclosure is one of the things a court looks at if the agreement is ever challenged as unconscionable, and because an agreement is easier to keep to when neither party is surprised later by what the other owned.

Disclosure can also be satisfied where a party already had, or reasonably could have had, adequate knowledge of the other party’s property and debts. Fam. Code, § 1615, subd. (a)(2)(C)

An agreement that was unconscionable when it was signed is not enforceable where the party against whom it is asserted was not given disclosure, did not waive disclosure in writing, and did not otherwise have adequate knowledge. Fam. Code, § 1615, subd. (a)(2)

The other party needs their own lawyer, and for a business they need a good one

One lawyer cannot act for both people. This office acts for the party who instructs it and will not advise the other.

On a business agreement the asymmetry is real. One side has lived inside the company for years and the other is reading about it for the first time, from a schedule. A lawyer on that side is not a formality; they are the only person who will ask the questions that make the disclosure meaningful.

Where the agreement is also going to contain a spousal support term, representation stops being advisable and becomes a condition of that term working at all.

This office acts for one party only. The other party is free to retain any California lawyer they choose, and this office will not advise them.

A premarital agreement is not treated as signed voluntarily unless the party against whom it is later asserted was represented by their own independent lawyer when they signed, or was advised to seek one and expressly waived that right in a separate signed writing. Fam. Code, § 1615, subd. (c)(1)

A term about spousal support is not enforceable against a party who was not represented by their own independent lawyer when the agreement was signed. Fam. Code, § 1612, subd. (c)

What the agreement may cover, and what it may not

A premarital agreement may deal with each party’s rights in property, with buying, selling and managing it, with what happens on separation, dissolution or death, and with making a will or trust to carry the agreement out. A business interest sits squarely inside that.

Two limits are worth naming. Arrangements for a child are not settled by the parents’ agreement about money. And there is an outer edge to what any agreement reaches, whatever the parties would prefer.

A premarital agreement may cover each party’s rights in property, how property is bought, sold or managed, what happens to property on separation, dissolution or death, the making of a will or trust, the ownership of a life insurance death benefit, and which state’s law applies. Fam. Code, § 1612, subd. (a)

A premarital agreement cannot adversely affect a child’s right to support. Fam. Code, § 1612, subd. (b)

Beyond the specific subjects the statute lists, a premarital agreement may cover any other matter that does not violate public policy or a statute imposing a criminal penalty. Fam. Code, § 1612, subd. (a)(7)

Timing, when investors are waiting

Business agreements are frequently made against a deadline that has nothing to do with a wedding: a funding round closes, a partnership agreement is being signed, a buyer is doing diligence.

The signing period is a floor and it is counted in calendar days, and everything else has to fit before it starts. Assembling a real financial picture of a company takes longer than assembling one for a salaried employee, and the other party’s lawyer will need time with it.

The honest planning number is weeks rather than days. Where a deadline cannot accommodate that, this office says so at the start rather than discovering it at the end.

On an agreement signed on or after 1 January 2020, at least seven calendar days must pass between the day a party is first given the final agreement and the day that party signs it, whether or not that party has a lawyer. Fam. Code, § 1615, subd. (c)(2)(B)

If the business started after the wedding

Plenty of founders come to this question in the wrong order: the company already exists, it was started during the marriage, and now somebody wants certainty about it.

That is an agreement between people who are already married, and different law governs it. The relevant point here is that it is available and it is common, not that it is a lesser option.

An agreement made after the wedding is not a premarital agreement, and the Uniform Premarital Agreement Act does not govern it. Fam. Code, § 1600 et seq.; Fam. Code, § 1610, subd. (a)

How this office prices and runs it

A flat fee, quoted before anything begins, and no hourly billing. The fee agreement says what it covers.

What it does not cover is worth knowing in advance: valuing the business, restructuring it, or preparing corporate documents. Those are somebody else’s work, and where they are needed the office says so rather than absorbing them into a fee that did not contemplate them.

This office quotes a flat fee before any work begins, and the written fee agreement states what it covers, when each part is earned, and your right to a refund of anything not earned.