Why We Ask Non-Owner Spouses to Consent to Shareholder Agreements and LLC Member Operating Agreements
Washington is a community property state, which means the spouse of a business owner holds a 50% ownership interest in his or her spouse’s business as part of the married couple’s community estate. In cases of divorce, this means that the non-owner spouse could be awarded 50% of his or her spouse’s interest (stock) in the business as part of a property settlement. In the case of death, most of the time it means the non-owner spouse will obtain 100% of the deceased spouse ownership interest (stock) in the business.
Companies your size typically require the owners to actually work in the business for the company to function. The owners have full-time jobs in their business.
So this comes into play in divorce, disability or death situations.
As harsh as this may sound, most business owners do not want to be in business with a non-owner spouse of their partner. The non-owner spouse often knows very little about the business and cannot participate as a true owner. Plus, the non-owner spouse often has his or her own career that they prefer over being a business owner.
So, in a Shareholder Agreement, we often adds language that says:
In the case of divorce, the divorcing spouse will pay cash to his or her spouse in the property settlement (as opposed to the spouse being given actual stock in the corporation in the property settlement).
In the case of death, the remaining business owners will buyout the surviving spouse. Life insurance is often used to fund this.
In the case of permanent disability, the remaining owners will buy-out their disabled partner because they need to get someone in to fill the shoes of the disabled owner. Disability insurance can be used to fund this, but it’s expensive.
We ask the non-owner spouses to sign off that they understand and agree to all of this.
Contact Mark D. Walters