If spouse is 30% silent shareholder of my s-corp, what happens in the event of a divorce? 22 Answers as of June 14, 2011

I'm considering forming an S-Corp and trying to decide if I should make my spouse a 30% silent shareholder. Though I don't see us ever divorcing, before I put the paperwork in place I want to know how that 30% would play out if we were to split up. Thank you.

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Deal & Hooks, LLC
Deal & Hooks, LLC | Shawn P. Hooks
He would have an interest in your company should you divorce. That interest would be his to do with as he wants. He would not be required to sell or forfeit the interest and you would have him as a 30% partner even after the divorce unless he opts to get rid of his share.
Answer Applies to: Ohio
Replied: 6/14/2011
Warner Center Law Offices of Donald F. Conviser
Warner Center Law Offices of Donald F. Conviser | Donald F. Conviser
If you start a business and form an S Corp during the marriage, no matter whose name (yours or your wife's) the stock is in, the S Corp is community property. So even if you give her a 30% interest via stock, she still has a 50% interest in the S Corp.
Answer Applies to: California
Replied: 6/8/2011
Howard W. Collins, Attorney at Law
Howard W. Collins, Attorney at Law | Howard W. Collins
In Oregon, It really doesn't matter what percentage you put on it. If the S corporation is a martial asset which grows in value during the marriage, she is entitled to 50% of the net equity of the corporation. Her name as owner is irrelevant. This is the presumption position of the law, with some exceptions. If she is a 30% shareholder, she is entitled to all the rights of any shareholder of a corporation.
Answer Applies to: Oregon
Replied: 6/8/2011
Seattle Divorce Services
Seattle Divorce Services | Michael V. Fancher
Under Washington law, it is up to the court to decide how to divide up the property in a divorce. Under the facts you gave it sounds like the s-corp would be community property anyway, but you should consult with a business attorney in your area as to the implications of making your husband a shareholder.
Answer Applies to: Washington
Replied: 6/8/2011
Reeves Law Firm, P.C.
Reeves Law Firm, P.C. | Roy L. Reeves
This is easy. The S-Corp formed during the marriage is presumed to be community. Therefore when you divorce . . . IF you divorce, each gets half of the stock registered to the other spouse. Using your scenario, you maintain 70% ownership, place 30% in your spouse's name. Upon divorce, you get 1/2 your stock, 1/2 of your spouse's 30% leaving you with 50% of the total. Your spouse gets the corresponding shares. Now, if you have property, that you can show is your separate property, and you use that property to start the S-Corp. then upon divorce, you can trace the 70% as your separate property and still ask for 1/2 of the spouse's 30% shares. I say you can ask because the adage pigs get fat, hogs get slaughtered does have meaning in this context. You would be much better off either letting him/her have the 30% or just hold 100% of the shares in your name. Finally, in case I missed the point of your question altogether, shares of ownership have nothing to do with control of a company in the context of a S-Corp. Generally speaking, in cases like this, ownership or shares are just paper. One spouse tends to operate and control the company for income purposes. At divorce, the Court seldom interferes with this arrangement, rather one party (the one operating the company) is ordered to buy out the other party (who has no operational control). If you are engaging in "Divorce Planning" . . . you really need to make an appointment with myself or a lawyer who has experience in family and business law. There are subtle ways to accomplish some planning, but you can never protect all your assets by forming a corporation after marriage.
Answer Applies to: Texas
Replied: 6/8/2011
    Edwin Fahlen Attorney at Law
    Edwin Fahlen Attorney at Law | Edwin Fahlen
    This procedure and documentation must be carefully drafted if you are trying to avoid a 50/50 Community Property interest. The reason being, if the documentation is not perfected, the wife will become a 50/50 owner by virtue of the marriage applying the Family Code law. If you do it on your own, be prepared for a 50/50 division in the event of a divorce.
    Answer Applies to: California
    Replied: 6/8/2011
    John E. Kirchner, Attorney at Law
    John E. Kirchner, Attorney at Law | John Kirchner
    Generally, at the time of the divorce 100% of the S-Corp will be considered marital property regardless of how the shareholder ratio is defined. Whether both spouses are shareholders may or may not have any relevance to how property will be divided in a divorce. What may be more critical will be what kind of contribution to the value of the business was made by each spouse. And, keep in mind that when dividing marital assets, the division applies to the overall marital pie - not to each item. So, if there are other assets equal in value to the value of the S-Corp, on "fair" solution might be for you to get the S-Corp and your wife to get the other assets. For current planning about something that may be many years in the future, the simple answer to your question is that whether your wife is a 30% silent partner is basically irrelevant by itself. You probably should consult an attorney about the possibility of a marital agreement (like a pre-nup, but it can be done after marriage) that would deal with your long term planning and concerns.
    Answer Applies to: Colorado
    Replied: 6/8/2011
    Law Office of James Lentz
    Law Office of James Lentz | James Lentz
    Let's get the definitions right first. If you mean "silent shareholder" to mean a person who contributes assets to the corporation, but does not hold any stock of record, I believe your husband would be treated as if he made a loan to the corporation. But the person to confirm this with would be a corporate law attorney in your particular state. She could also help you to get your S-corp up and running and explain other entity formations like LLC that you may want to consider.
    Answer Applies to: Ohio
    Replied: 6/8/2011
    Vermeulen Law office P.A.
    Vermeulen Law office P.A. | Jacob T. Erickson
    In Minnesota all property, including the entirety of your ownership in the company, is considered marital property subject to division if that property is acquired during the marriage, and is not traceable to exclusively non-marital property, such as property you owned before the marriage or property that you received by a specific gift.
    Answer Applies to: Minnesota
    Replied: 6/8/2011
    Michael Anthony Wing, P.C.
    Michael Anthony Wing, P.C. | Michael Anthony Wing
    Depending on the length of marriage, and the extent that the corporation is considered a part of the marital estate, then it may be subject to division, regardless of the original percentage ownership. Stay well.
    Answer Applies to: Alabama
    Replied: 6/8/2011
    Goolsby Law Office
    Goolsby Law Office | Richard Goolsby
    I would recommend that you consult with a divorce lawyer in your community and discuss all the facts with him or her about such an important issue. For instance, your attorney will discuss with you the potential as to whether or not your action might make it more likely that your company would be subject to division or sale down the road, in the event of a divorce. But there are other concerns, too, so you should consult with a lawyer. Good luck!
    Answer Applies to: Georgia
    Replied: 6/8/2011
    Beaulier Law Office
    Beaulier Law Office | Maury Beaulier
    It matters little how shares are divided in a corporation between spouses. If the asset was acquired during the marriage, each party to the marriage is presumed to have an equal interest in that asset. As a result, your spouse may be awarded one half of its value, often determined by a business appraiser. That interest can be paid in cash as a lump sum, over time or by an award of equally valued marital assets.
    Answer Applies to: Minnesota
    Replied: 6/8/2011
    Cody and Gonillo, LLP
    Cody and Gonillo, LLP | Christine Gonilla
    Your interest and her interest would be part of the marital estate.
    Answer Applies to: Connecticut
    Replied: 6/8/2011
    Fredric H. Aaron, Attorney at Law, P.C.
    Fredric H. Aaron, Attorney at Law, P.C. | Fredric Harlan Aaron
    To begin, I am not certain what you mean by "silent" shareholder. Have the shares been issued to your spouse? If this is the case, then he/she is a minority shareholder, but not a silent partner. In any event, since you will be forming the S-Corporation during the marriage, in the event of a divorce, the value of the corporation will be included in the marital estate for purposes of equitable distribution. It doesn't matter what percentage ownership your spouse has in the corporation, or even if he/she is a shareholder; the corporation will be considered marital property. However, you can attempt to get your spouse to waive his/her rights to the corporation, but it is unclear if this waiver will help you in the event of a divorce.
    Answer Applies to: New York
    Replied: 6/8/2011
    Owings Law Firm
    Owings Law Firm | Tammy B. Gattis
    You are each a 100% owner of all of the stock so it makes no difference what percentage you "give" your spouse.
    Answer Applies to: Arkansas
    Replied: 6/8/2011
    Glenn E. Tanner
    Glenn E. Tanner | Glenn E. Tanner
    The interest would be a community asset presumably just like your interest in the S Corp, subject to a fair and equitable division. What would be fair and equitable would depend on what else there was and many other factors. If you are asking could you end up in business with your ex wife. Yes you could.
    Answer Applies to: Washington
    Replied: 6/8/2011
    Beresford Booth PLLC
    Beresford Booth PLLC | S. Scott Burkhalter
    In Washington State, in the event of divorce, the Court will make a fair and equitable division of assets and debts.
    Answer Applies to: Washington
    Replied: 6/8/2011
    Ashman Law Office
    Ashman Law Office | Glen Edward Ashman
    It sounds like you are about to potentially screw up your life, your business and your marriage. This is not a pro se project. You need a lawyer. First of all there is no such thing as 30% silent shareholder. The documents you draft will determine what happens if one of you dies, or if you are divorced. And before you get to that point, the advice you get from your CPA and lawyer will determine if you should even incorporate at all, and if you do, whether subchapter S is appropriate. Bear in mind that even if you own ALL the stock, she could win some or all of the business in a divorce, depending on the documents that are drafted.
    Answer Applies to: Georgia
    Replied: 6/8/2011
    Willick Law Group
    Willick Law Group | Marshal S. Willick
    While relevant, the internal divisions are generally not as important as the accrual of any property interest during marriage, in the absence of a premarital agreement, which will generally considered to belong to both spouses 50/50.
    Answer Applies to: Nevada
    Replied: 6/8/2011
    Law Office of L. Paul Zahn
    Law Office of L. Paul Zahn | Paul Zahn
    If the company is established using community funds, it is my feeling that both husband and wife have a community interest in all shares held in either person's name (absent a specific separate statement which contradicts this).
    Answer Applies to: California
    Replied: 6/7/2011
    Law Office Of Jody A. Miller
    Law Office Of Jody A. Miller | Jody A. Miller
    I cannot say for sure because we don't know what will happen with the company or her future participation or what the other circumstances of your situation would be in the future at the time of a divorce. The only fail-safe thing to do would be to execute a post-nuptial agreement (like a prenup but after you're married) that dictates what would happen to the 30% in the event of a divorce.
    Answer Applies to: Georgia
    Replied: 6/7/2011
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