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As many of you may know, I represent hard working men and women who own their own businesses. Incorporating a business helps protect the owner’s assets against claims brought by corporate creditors. Ownership of a corporation is evidenced by shares of stock and any stock transactions should be recorded in the corporate book. Although incorporating the business helps protect the owner, consideration should also be given to protecting the corporation, and the owner’s spouse, from claims against the shareholder.
In the case of a married couple, holding the shares as “tenants by the entireties” can protect the shares from being seized by a creditor of one of the two spouses. “Tenants by the entireties” historically applied to real estate and was the mechanism by which most married couples held real estate. Upon the death of one spouse, the property becomes the property of the other spouse by operation of law.
Property held as tenants by the entireties is owned indivisibly by both spouses. The property can’t be transferred without the consent of both spouses and each has an equal right to possession and use of the property. Property held as tenants by the entireties has the following characteristics: 1) joint ownership and control; 2) each spouse has an equal interest in the property; 3) the spouse’s ownership must originate from the same document; 4) the spouse’s ownership must commence at the same time; and 5) the couple must be married.
If a person has a judgment against one spouse, but not the other, property owned as tenants by the entireties can’t be seized and sold to pay the judgment. Because of this, couples should consider holding the stock of their family owned business as tenants by the entireties (which means they each indivisibly own one hundred percent of the business) and not as 50%-50% shareholders.
In order to properly protect the shares as property held as tenants by the entireties, stock certificates should be issued naming both spouses as owners. If one spouse initially owns the shares, it will be necessary to reissue stock certificates. The transfer should also be evidenced by a share transfer agreement and the transfer reflected in the corporate books. I recommend consulting an attorney.
Failure to properly transfer the shares into property held by the entireties can be disastrous, as one couple learned when the husband’s shares of stock in the family business were seized by a creditor to repay an unsecured promissory note. The husband argued that the shares were held as tenants by the entireties and thus free and clear of the creditor’s claims.
However, the corporate book didn’t show the transfer from the husband to himself and his wife. New shares were never issued. The transaction was never recorded in the corporate book. The judge held that the couple’s testimony that they intended the stock to be held as tenants by the entireties was insufficient. As a result, the creditor ultimately became the new owner of the business.