When a divorce occurs, couples need to consider many areas. Each of these comes with its own complexity, one of which concerns business interests and assets.
If some business assets are involved between a husband and wife, for example, both parties jointly hold a company or one party alone owns a business, how should these asset interests be divided? In today’s family law article, Let’s take a look at what should divorced couples do when business assets are involved in the divorce.
Are business interests considered shared assets in a divorce?
Business interests between a husband and wife can take different forms, such as shares or debentures in a limited company, shares in a partnership, or a sole proprietorship.
In England, Wales and Northern Ireland, a business interest will generally be considered a matrimonial asset by the courts, and its value will therefore need to be added to the marital estate pool. It doesn’t matter which spouse started or ran the business.
That is, if you start a business, even if your spouse has never been involved in running the business, the business interests in the business are included in the divorce settlement and need to be shared fairly between the parties. Of course, as with other assets, there are some exceptions to this rule, depending on the specific circumstances of each case.
How do courts treat business assets in financial settlements?
Generally speaking, the court must aim at a fair outcome and use its best endeavours to meet at least the basic day-to-day needs of the parties and any children.
The courts will not destroy your business while handling a divorce case. Generally, if the business is established by one spouse and then managed independently, the courts will usually try to ensure that that spouse fully retains the business. Often this is the sole or main job of an individual, so by dividing up the business or forcing them to sell it can mean depriving them of their livelihood. Courts are unlikely to view this as a sensible or fair outcome.
If this is the case, then the spouse who owns the business does not necessarily need to share that business interest with their ex. However, they may have to give up alternative assets, for example, their share in the marital property may be used as a substitute for the value of business assets, or they need to give the other party matching alimony, etc. If the value of the replacement assets is insufficient, a certain number of shares (in the case of a limited company) may need to be transferred to the other spouse.
What if it’s a family business?
Things get more complicated when both parties contribute to the business (e.g., partnership, with equal shares as directors of the company). In the event of an amicable separation, both spouses may remain as business partners, or one spouse may retain their share in the business, but not participate in the management of the business, allowing their former spouse to manage the business.
However, the two parties still retain the family business, and the way of continuing cooperative management may not be the best solution. It is easy for both parties to have quarrels due to a broken relationship, and these disputes can negatively affect business performance.
Therefore, if neither of the above solutions is desirable, one of the spouses can sell their share in the business to their former partner (husband, wife or civil partner), or to a brand-new director/business partner.
However, if a resolution cannot be reached, the divorcing couple can either sell their business and divide the assets or petition the court for a ruling.
Valuing a Business During a Divorce
Whether your business is owned solely by your ex-partner or jointly owned by both of you, you will often have a business valuation of the business during the divorce financial settlement stage. This value will be considered for property distribution when the court decides on a financial settlement.
If the business is owned by one spouse (whether directly or jointly with other business partners), then that party can arrange a valuation. If the divorced parties have common business interests, either party can arrange a valuation.
Valuing a business or business interest is a complex process as it involves:
- cash reserves
- Corporate Supported Living Standards
- Places such as corporate offices, vehicles, etc.
- The value of personal and corporate pensions
- Is it possible to withdraw capital from the business
- Is it possible to borrow against the business or its assets
- Company ownership structure, i.e., whether it is a limited company, sole proprietorship, or partnership.
Since it is so complex, the valuation process is expensive. If you and your ex-partner can agree on business values, the process will be less expensive. However, once the divorce parties disagree on the valuation results of the business, then they will face complicated and expensive court fees. We therefore recommend that, before you begin the valuation process, it is best to obtain legal advice in advance.
What if the two parties disagree on the valuation?
As mentioned above, divorcing couples may not agree on the value of a business. Especially if the company is owned by the ex-partner alone, he or she may underestimate the value of their obligations. What if you disagree with what your partner says about the business value, or say they don’t cooperate?
First, everyone can use their own experts to assess business value. However, this action is expensive. In some cases, people spend thousands of pounds on professional accountants. However, if your ex-partner is uncooperative or offers a particularly low valuation, this may be the only option.
Second, you can ask a lawyer to look at the company’s books to see if it’s worth further investigation.
Third, you and your ex-partner agree to use what is known as a “single joint expert” to evaluate the business. This person is independent and can provide an unbiased valuation. It is important to obtain legal advice before you do this.
Fourth, talk to your ex-partner to see if you might consider using a third-party mediation agency or other dispute resolution method to help you dispute your business interests.
How to protect your business assets?
If you’re running a business or business by yourself, the pressures of running a business can be overwhelming. Now, the strength of the company has finally grown, but it has encountered a divorce. Not only do you have to be busy with work, but you also have to guard against your ex-partner. You don’t want him/her to take away the money you have worked so hard for. It is really a headache.
While you cannot exclude your business interests from a divorce settlement, there are several ways you can protect your business in a divorce:
- Entering into a postnuptial agreement or separation agreement, which can protect business assets and help limit future arguments;
- Separate business assets from household finances. It is necessary for the spouses to completely separate any profits of the company/business during the marriage. For example, reinvesting those profits back into the business of the company, rather than using them to pay off the mortgage on the family home, etc.;
- Sacrificing other assets as part of an overall divorce settlement — known as an offset — is beneficial for spouses who want to retain control of their business or business interests.
Cases involving business assets in divorce are often complicated, and we recommend that you consult a legal expert before taking any steps. If you have the above confusion, please contact Lisa Law Firm further, our team of family law lawyers can assist you to solve the problem.
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