Divorce is never an easy time, but it can be made a lot easier if you and your partner can sit down and have a direct discussion about the future of your business. When you’re at home, working on the same projects as you were while married, it’s easy to forget that in the eyes of the law, you’re still two separate people.
One of the biggest mistakes people make when they divorce is assuming that their ex-spouse will be happy with a 50%-50% split of all assets, including their business. That might be fair to both partners individually, but for many reasons (including tax), it may not work for you as a couple.
Before you start talking about dividing everything up, it’s vital to understand what happens to businesses when they are divided up in divorce proceedings.
Two things come into play: the ownership of your business and its profits.
Choose your business structure carefully before you start it up
You may have already set up your business. Did you choose the right structure for it? As a sole trader, partnership or limited company? This decision will be a crucial part of protecting yourself from divorce proceedings. If you set up as a limited company, then the business is owned by its shareholders (you) and not by any individual. Therefore, in event of a divorce, your spouse would only be able to claim their share of the assets that were sold as part of the divorce settlement – and not necessarily the value of their share in the company itself.
The law is complex, and the facts of each case will be different. However, broadly speaking, there are two main options:
The first is to agree with your ex-spouse that the business should be sold and distribute the proceeds between you (or use them to settle other matters, such as outstanding debts). In this situation, a court would expect you to pay your ex-spouse their share at the time of sale.
In the second situation, even if you are against selling the business, the court may order its sale if this is justified by other factors which it will consider to achieve a fair outcome for both parties. In this situation, it may also decide that one party will receive more than 50% of any cash from the sale. Or that one party can buy out the other party’s share in the business.
If you cannot agree on what should happen to your business because you have different needs or priorities after divorce (for example, if you have children), then a court may need to decide. It could mean going through a process called “matrimonial proceedings” or “divorce proceedings”
The value of your business
The first thing to do is to understand the valuation of your business. The valuation will help you understand what the business is worth, both as a going concern and in liquidation. That is vital because it will guide you on how to proceed with your settlement. The starting point for valuing a business is to look at its accounts and records. An accountant can advise you on the correct way to value your business. It’s also crucial that you don’t attempt to move money out of the business if you think you might be headed for divorce. The courts require full financial disclosure and will be looking at any suspicious activity. This kind of behaviour could work against you in court.
Lawyers are necessary because there can be surprises in court
During a divorce, some business owners can be surprised to learn that the courts are not necessarily interested in preserving the value of their businesses. Rather, the court’s job is to provide a fair division of property for both spouses. Thus, if the value of your business has grown substantially since you started it, but your spouse contributed little or nothing to its success, chances are good that the court will divide it in such a way as to provide fair compensation for both spouses.
That can be highly contentious, however. It’s not uncommon for spouses to disagree on what constitutes “success.” For example, if your spouse helped you get into a prestigious job program or increased your business’ revenue by bringing in new customers, they might be able to claim an interest in the business through these contributions.
Be careful and ready to defend your property because the worst solution is for the business to completely fail due to divorce.
Alison Pearson is an interior design student. She is a writer and designer, and her ultimate passion is art and architecture. She is also a bibliophile and her favourite book is “The Sound and the Fury” by William Faulkner. Follow her on Twitter.