Prenups for Business Owners

What a Premarital Agreement Is Under California Law

Family Code section 1610(a) defines a premarital agreement as "an agreement between prospective spouses made in contemplation of marriage and to be effective upon marriage." People more often call it a prenuptial agreement or a prenup. All three names mean the same contract.

California adopted the Uniform Premarital Agreement Act, found at Family Code sections 1600 through 1617. That matters because a prenup is not judged by general contract law alone. The Act has its own rules about form, content and enforcement, and a court looks to those rules first.

The form rule is short. Under Family Code section 1611, "A premarital agreement shall be in writing and signed by both parties. It is enforceable without consideration." "Consideration" is the lawyer's word for something of value exchanged for a promise. Section 1611 removes that requirement, so the marriage itself is enough to support the agreement. A spoken understanding between partners, however sincere, is not a premarital agreement under California law.

The content rule lives in Family Code section 1612, which lists what the parties may and may not contract about. For a business owner, that list is the heart of the matter.

What a Prenup Can Cover: The § 1612 Framework

Section 1612(a) says the parties "may contract with respect to all of the following." There are seven categories. Each is set out below in the statute's own words, followed by what it tends to mean for someone who owns a business.

(1) Property rights. "The rights and obligations of each of the parties in any of the property of either or both of them whenever and wherever acquired or located." This is the broadest category. An ownership interest in a corporation, an LLC membership interest, a partnership share or the assets of a sole proprietorship are all property. The agreement can say whose property it is now and whose it will be later, including property not yet acquired.

(2) Management and control. "The right to buy, sell, use, transfer, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of, or otherwise manage and control property." For an owner, this can address who has the power to sell the company, take on business debt secured by its assets, or bring in new investors without the other spouse's sign-off.

(3) What happens when the marriage ends. "The disposition of property upon separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event." "Marital dissolution" is the legal term for divorce. This category lets the agreement say what happens to the business at a divorce, at a death, or on some other stated event.

(4) Estate documents. "The making of a will, trust, or other arrangement to carry out the provisions of the agreement." A prenup can commit each spouse to sign estate documents that carry out what the prenup says about the business.

(5) Life insurance. "The ownership rights in and disposition of the death benefit from a life insurance policy." Owners sometimes carry policies tied to a business. This category reaches who owns those death benefits and where they go.

(6) Choice of law. "The choice of law governing the construction of the agreement." "Construction" here means interpreting the agreement. The parties can name the state whose law will be used to read it.

(7) Other matters. "Any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty." This is a catch-all with a limit built in.

One limit sits right beside the list. Section 1612(b) provides that "the right of a child to support may not be adversely affected by a premarital agreement." The limits on what a prenup can do are covered further below.

Why Business Ownership Makes a Prenup Different

California is a community property state. Family Code section 760 provides that, "Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." "Community property" means property that belongs to both spouses together. "Separate property" is property that belongs to one spouse alone, and it generally includes what a person owned before the marriage.

So a business started before the wedding generally begins as separate property. The difficulty is what happens next. An owner keeps working in the business after marrying, and that time and effort is generally treated as community effort. Marital earnings might go into the company. Profits might be kept in the business instead of being paid out. When the business grows in value during the marriage, a question arises in a later divorce: how much of that growth came from the separate asset itself, and how much from community labor or money? Without an agreement, a court answers that question on the evidence presented, and the answer is not always what either spouse expected.

A business's value can include goodwill, and that value is decided on the evidence, often with experts. Those disputes take time and cost money, and each side may see the numbers very differently.

A premarital agreement can settle those questions before they come up. Section 1612(a)(1) and (a)(2) let the parties define how the business interest will be treated. They might keep it entirely separate property, growth included. They might treat some or all of it as community property. Or they might set a defined formula for sharing growth during the marriage. Section 1500 confirms the general point: the property rights spouses would otherwise have under statute "may be altered by a premarital agreement." For a person who has spent years building a company, there is real relief in being able to write the rule down while both partners are calm and on good terms.

Enforceability: What California Requires

Family Code section 1615 is the test a court applies when one spouse asks it not to enforce the agreement. Under section 1615(a), a prenup is not enforceable if the challenging spouse proves either of two things. The first is that they did not sign it voluntarily. The second is that it was unconscionable when signed, meaning so one-sided that it shocks the conscience, combined with a failure of financial disclosure.

Voluntariness. Section 1615(c) says the agreement is deemed not voluntary unless the court finds, in writing or on the record, all of the following:

• The challenging party had independent legal counsel when signing. Alternatively, after being advised to seek independent counsel, that party expressly waived representation in a separate writing. The advisement to seek counsel must be made at least seven calendar days before the final agreement is signed.
• For agreements signed on or after January 1, 2020, the party had "not less than seven calendar days between the time that party was first presented with the final agreement and the time the agreement was signed, regardless of whether the party is represented by legal counsel." This does not apply to nonsubstantive amendments that leave the terms unchanged. Agreements signed between 2002 and 2020 follow a slightly different version of the rule.
• If unrepresented, the party was fully informed of the terms, the basic effect of the agreement, and the rights being given up. The party also had to be proficient in the language used. That explanation must be put in writing and delivered before signing, and the party must sign a document confirming they received it and stating who provided it.
• Neither the agreement nor those writings were signed under duress, fraud or undue influence, and neither party lacked capacity.
• Any other factors the court deems relevant.

Disclosure. Under section 1615(a)(2), the unconscionability challenge also requires that, before signing, the challenging party was not given "a fair, reasonable, and full disclosure of the property or financial obligations of the other party." It also requires that the party did not waive further disclosure in writing and did not have, or could not reasonably have had, adequate knowledge of the other party's finances. For a business owner, the disclosure question usually centers on the business. That means its ownership, its financial picture and its obligations. Under section 1615(b), unconscionability is decided by the judge "as a matter of law."

Meeting each of these requirements improves the footing of an agreement, but enforcement is not assured. A court weighs the facts in front of it, and the statute itself leaves room for "any other factors the court deems relevant."

How San Diego County Courts Handle Prenuptial Agreement Disputes

A dispute over a prenup in this county is heard in the family law case at the Superior Court of California, County of San Diego. The court sorts family law cases into four divisions using its ZIP Code List (ADM-254):

• Most family law cases from the ZIP codes the list assigns to the Central Division are filed at the Central Courthouse, 1100 Union Street, San Diego, CA 92101.
• Most family law cases from ZIP codes assigned to the North County Division are filed at the North County Regional Center, 325 South Melrose Drive, Vista, CA 92081.
• Most family law cases from ZIP codes assigned to the East County Division are filed at the East County Regional Center, 250 East Main Street, El Cajon, CA 92020.
• Most family law cases from ZIP codes assigned to the South County Division are filed at the South County Regional Center, 500 3rd Avenue, Chula Vista, CA 91910.

A challenge to a prenup is not usually a separate lawsuit. It is raised within the divorce or legal separation case in whichever division hears it. One spouse asks the court to enforce the agreement's terms about the business. The other may argue, for example, that they did not sign voluntarily under section 1615. The judge then decides whether the agreement controls. Section 1617 adds that any statute of limitations for a claim under a premarital agreement is tolled, or paused, during the marriage. Defenses such as laches, which concerns unreasonable delay, and estoppel remain available to either party.

For someone signing today, it can feel strange to picture a courtroom. The point of knowing where these disputes go is simpler. The agreement is written now to be read later by a San Diego Superior Court judge applying sections 1612 and 1615.

What a Prenup Cannot Do

Child support is off the table. Section 1612(b) provides that a child's right to support "may not be adversely affected by a premarital agreement." Parents cannot agree in advance to limit what a future child will receive, however the business is arranged.

Spousal support provisions carry two separate risks under section 1612(c). "Spousal support" is support paid from one spouse to the other after separation. First, any provision about it, including a waiver, "is not enforceable if the party against whom enforcement of the spousal support provision is sought was not represented by independent counsel at the time the agreement containing the provision was signed." Second, it is not enforceable "if the provision regarding spousal support is unconscionable at the time of enforcement." That second test looks at circumstances years after signing, not only on the wedding day. The statute also says that having independent counsel does not, by itself, rescue an otherwise unenforceable spousal support term.

Public policy and criminal statutes set the outer edge. Section 1612(a)(7) allows "any other matter" only if it is "not in violation of public policy or a statute imposing a criminal penalty." A term outside that boundary will not be enforced.

Timing and the Agreement's Relationship to Business Planning

Under Family Code section 1613, "A premarital agreement becomes effective upon marriage." Before the wedding it has no legal effect. On the wedding day, it governs.

The seven calendar days in section 1615 are a minimum, not a target. They run from when the final agreement is first presented, and the advisement to seek counsel also comes at least seven days before signing. Drafting, disclosure of the business's finances, review by each side's counsel and negotiation over terms all come before that final version exists. Agreements that deal with an ownership interest, growth formulas and management rights typically take longer to work through than a simple one. A wedding date that is close at hand can squeeze that process.

A prenup also does not exist alone. Many business owners already have an operating agreement, shareholder agreement or buy-sell agreement. Those documents may say what happens to an owner's interest on divorce or death, who may hold shares, and how a departing owner is bought out. When the prenup addresses the same business, the documents work best when they are consistent with each other. Conflicting terms invite exactly the kind of dispute the prenup was meant to prevent.