Special Financial Considerations for Husband & Wife Family Businesses

The Wall Street Journal reported that one-third of all family businesses are operated by husband and wife teams, representing a substantial number of all businesses.  The dynamic of the team, however, can vary greatly.  In some cases, one spouse will start the business, or may already be involved in an existing family business prior to marriage.  In other cases, the family business may be jointly founded by the spouses during marriage.  The roles of the spouses may also vary greatly:  They could be co-owners; one may be the owner while the other is considered an employee; they may both be equally active in the business; or one may be more of a passive participant while the other makes the business his or her life’s work.


Money matters.  No matter how the family business started or the roles each spouse plays, there are financial ramifications to be considered before and during the running of the business.  Some benefits are clear:  Spouses living and working together may reap savings in taxes, health benefits, child care and other work-related expenses.  And, during economic downturns, a husband and wife can pull together to make it through. But, the fortunes of one affecting the fortunes of the other can also make their financial survival more difficult.  Before jumping into the business together, it may make sense for one spouse to keep an existing job, either full- or part-time to contribute and/or provide health benefits while the business is built up enough to support them both.


The structure of the business can affect how it is treated for income tax purposes.  The business could be formed as a C-corporation, Subchapter S-corporation, partnership, proprietorship or limited liability company.  One spouse may be considered the sole owner, while the other spouse could be hired as an employee.  All of these options should be driven by the specific needs of the individual company.


What’s love got to do with it?  Most marriages start on the basis of love, but nearly half of them end in divorce.  The financial reality is that a family business is often the most valuable asset of an owner, so there is good reason to consider a prenuptial agreement to protect the family business and its place in the line of the family of origin.  Keeping in mind that each state has its own laws regarding division of assets and that the other divorcing spouse may still receive part of the business, there are more options to clearly outline expectations and the mutual desire of an about to be married couple to preserve wealth and success of the business for all, especially their children.


Of course, some couples don’t have the foresight or the cynicism to consider a prenuptial agreement.  The other financial consideration here is causing the least financial damage if the spouses agree that divorce is the only option, with the goal being to divide the business’s wealth, but not the family business itself.  Just the knowledge of a divorce, especially if acrimonious, may affect the financial well-being of the business in the eyes of clients, vendors and the community.  Typically one spouse keeps ownership and has to buy out the other one, but having enough liquid assets to make this payment may not be possible.  Advanced financial planning with their financial business consultants can allow family business owners the flexibility to plan for many instances, including divorce and the unexpected sale of the business, perhaps due to death or disability of one of the spouses.


Planning for the unthinkable.  There cannot be a discussion of financial considerations of husband and wife family business owners without involving estate planning and succession planning.  In the best case, the spouses retire and pass the business on to one or more of their children.  In the less desirable but always possible cases, there is a death (expected or not), temporary or permanent disability, or some other circumstance that prompts a change in ownership.  As with divorce laws, estate and inheritance tax laws can change and affect how a husband and wife set themselves up in the best interest of the family business.


It may seem like a built-in solution for all the assets including the business to be passed on to the surviving spouse, as estate taxes may be avoided this way.  But this is really a temporary solution; the surviving spouse will eventually pass, and the estate taxes will eventually come due as the value of the business increases.  A financial consultant can explain the use of trusts and gifts to minimize or eliminate this risk.  The myriad of financial considerations for husband and wife family business owners makes it evident that advance planning is key, and ongoing review is necessary.  Spouses can enjoy the best of both worlds in living and working together, but this does not happen by accident or without first doing the ground work.


Contact me at rkvalo@curchin.com or 732.747.0500 with questions about setting up your family business to its best financial advantage, review or start your estate and succession planning, or to receive a complimentary consultation with our family business advisors.