So your husband or wife chooses to start a business. The development can be exciting, of course, but also trying, in ways that go beyond the usual stresses of launching a venture. Even if you’re not a full partner in the venture, working side-by-side with your spouse, the enterprise can still have profound effects, negative as well as positive, on your family finances and even your marriage.
Here are some steps couples need to take when one person decides to take the small-business plunge.
Prevent Harm to Your Marriage
You might compare the launch of a business within a family to the arrival of a baby, including the way in which it can quickly command center stage and disrupt other aspects of family life. As after a new human arrives in the family, experts advise that entrepreneurial couples continue to devote some time and energy to each other and their relationship, even if it’s less than they did before.
As the business proceeds, it can be human nature for the entrepreneur to keep bad news from their wife or husband. However well-intentioned, that lack of honesty isn’t wise, says Andrew Vaughn, the owner of NuVorce, LLC, a divorce law firm in Chicago. "If you’re trying to protect your spouse from the truth by pretending everything is going great, when really the business is struggling, you’ll have major problems down the road with your spouse. You need to be open and honest about what’s going on with the business so that you’re both on the same page through the ups and the downs."
Starting a business is a risk for both the owner and the spouse. By keeping your spouse fully informed of the good times and bad, you increase the likelihood that the business becomes a source of income and pride rather than conflict and confusion.
Face The Reality Of Any Investment
Acquiring funding is, of course, a major challenge for most new businesses. It’s natural to want to help out your loved one by tapping personal or even family funds. But before you do so, experts advise, keep in mind the relatively slim survival rate of new ventures. Almost half of businesses that open in any given year have failed within 5 years, according to the federal Small Business Administration.
The upshot? If you give your spouse money, there is a high likelihood that you will lose it. according to Joshua Zimmelman, President of Westwood Tax & Consulting, LLC in Rockville Centre, NY? "..[T]he [other] spouse should only fund what they are OK with potentially losing."
You should also be clear about the nature of the investment, say experts--and reach that clarity before the funding is pledged, rather than after any financial surprise arrives. Deborah Sweeney, the CEO of MyCorporation, says couples should answer the questions, "Is this a loan or an investment in ownership? Is there a need for reimbursement or does the spouse just take [their invested funds] out of profits," if and when those begin? In the absence of an agreed exit strategy, she notes. "one spouse may feel they are owed the money they invested while the other spouse may feel pressure to return money they [now] do not have." These feelings can set couples up for hurt, resentment or even marriage failure.
The impact can become higher still if you divert funds that were earmarked for other purposes, such as retirement, and were invested on that assumption. Brett Anderson, President of St. Croix Advisors, LLC in Hudson, Wisconsin warns that if you cash-out an IRA to fund a business, the federal government will be collecting taxes, and perhaps early-withdrawal penalties, off those funds, and the impact of those on the eventual amount you’ll have on hand "will not be pretty."
Rather than you or your spouse taking such drastic measures as reducing your retirement nest egg to fund the business, consider other options for capital, including obtaining a personal loan or small-business loan.
In addition, you should urge your spouse to find partners in the venture other than you, so as to spread the risk and reduce the impact of any failure. CEO Sweeney notes that "it can be a huge risk to have a spouse be your only investor – both personally and professionally," especially if the entity is large or the investment is extremely significant.
Weigh The Ongoing Impact On Family Finances
Regardless of how the business ultimately fares, the new business is liable to change, if not outright disrupt, the family budget. Divorce lawyer Vaughn recommends that couples discuss realistic financial projections for the business, including it may not turn a profit for a long while. You "need to be prepared to live a reduced lifestyle," Anderson says, and to understand that it often takes years before the owner of a new small business receives a "regular paycheck," and to be at peace with that reality.
Additional impacts of the budding business may include running up the family’s credit card debt or reducing the funds in your checking or savings account. If you find you’re funding too much of the business on a personal credit card, it’s time to consider other options, perhaps including a business credit card.
Protect Yourself Legally
There’s widespread agreement that whatever arrangement you reach on your spouse’s business should include ensuring it’s structured so as to protect you from liability. CEO Sweeney advises that "the personal assets need to be separated from those of each business." Personal and corporate bank accounts need to be separate as well. Divorce lawyer Vaughn concurs. "If the business fails, you won’t want your personal finances to be pulled down with it."