Surprisingly, the biggest threats to the continuation of a family business are not competition, creditors, or even lawsuits. They are divorce and the lack of an estate plan.

the big d

If you get divorced, you could lose up to 50 percent of your business to your former spouse.

On the other hand, if you give away or sell a large part of your business to an adult child in the family, a large part of the business may be lost.

This is because your former son-in-law or daughter-in-law may end up with half of your stake, which could be a majority stake. Since the divorce rate hovers around 50 percent, the possibility of this happening should be anticipated.

We’ve all heard the story of a family business that was attacked by the ex-spouses of older and younger family members alike. Usually, the patriarch of the family has gifted substantial shares of the family business to a child who works in the business.

When there is a divorce, nasty fights can break out over as much of the child’s share as possible. This situation may involve the company in prolonged litigation and has the potential to seriously disrupt business operations.

Of course, an antenuptial (premarital) agreement can save your family business from such a disaster. Don’t let poor asset protection planning cause your business to fail.

Your business planning should include divorce protection for you and other family members.

Successful Succession Plans

An estate plan is just as important as an estate plan, which provides for the distribution of your assets after your death.

The abuse of a proper succession plan has resulted in the distribution of many family businesses after the retirement of the founders.

Approximately two thirds of all family businesses do not survive to the second generation. Oftentimes, hurt feelings and infighting result when there isn’t a well-thought-out succession plan.

Other suggestions regarding protecting your business include:

Never operate a business or practice as a sole proprietor. This puts all of your personal assets at risk.

Worse still is running a business or practicing as a general partnership: you stake your personal finances on your actions and those of your partners. If you operate as a general partnership, make the corporations partners.

A corporation, LLC, or limited partnership is often the preferred way to structure a business, as it has less risk and exposure. This can also save taxes, probate fees, and help you stay in full control.

“Aim for the best. Plan for the worst.” Structure your business as defensively as is reasonably practical.

Your business should never directly own valuable assets, such as real estate, copyrights, high-tech equipment, etc.

Mortgages from friendly lenders or vendors can protect you from hostile creditors and lawsuits.

Bankruptcy can be an effective bargaining chip. However, if it is a real option, do some pre-bankruptcy planning with an asset protection specialist.

To substantially reduce taxes, while protecting assets and passing wealth tax-free to the next generation, consider using a VEBA.

Obviously, expert advice is invaluable.