Protecting your business against the impact of divorce
Elise Alma, Partner and Head of the Family team at Coodes Solicitors, explains how business owners can protect their business assets against the risk of divorce.
Business owners have an added layer of worry when their marriage breaks down. They have to consider the impact the divorce might have on the future of their business.
The impact of a divorce on the business will depend how the business ownership is structured. An important factor is whether or not the owner’s spouse has a stake in the business or any of its assets.
Matrimonial and non matrimonial assets
When deciding the division of finances, the divorce court approaches assets differently depending on whether they are ‘matrimonial’ or ‘non matrimonial’ assets. Matrimonial assets will be shared but non matrimonial assets can be left out of division if there are sufficient other assets to provide for the other person’s needs and a fair settlement.
The question of whether or not a business is a matrimonial asset is a complex one and you should seek specialist legal advice.
Running a business with your spouse
If you run a business with your spouse, they are inevitably going to recover their interest in the business if you divorce. The focus will then be on who is going to continue to manage the business and how the other will be paid out. Alternatively, you may possibly fall within the minority of couples who can, and wish to, still work together after the divorce.
If your husband or wife has had nothing to do with the business and all its assets are owned by you, the court will take a different approach. It will not want to see a settlement that requires the business to be sold, or jeopardises its future in any way, if this can be avoided.
Considering other business partners
If you are in business with third parties, whether family or business partners, the ownership structure can often reduce the business’ value on divorce. This will make it very difficult for your husband or wife to stake a claim.
If third parties have an interest in your business, but this has not been formalised, you should take advice about partnership agreements and structuring the business so that everyone’s interests are clear and documented.
Bringing a spouse into the business
We often see cases in which spouses have become a partner or shareholder in a business or business property for tax purposes. Be wary if this is something you are considering. It could turn some of your business assets into matrimonial assets. This means your husband or wife would have a greater claim to these assets in the event of a divorce.
You should also be cautious about borrowing against shared assets, such as the family home, to fund your business. This could also mean your business is viewed as a matrimonial asset by the divorce courts.
Prenuptial agreements: unromantic but important
Prenuptial agreements are still unpopular because they are not considered to be very romantic. However, they are important and very useful in giving you more control if you own a business. If you do not have a prenuptial agreement in place, it is advisable to get advice on a postnuptial agreement that can be put in place at any time after you are married.
Although they are not completely legally binding, pre or postnuptial agreements will be taken into consideration and indeed upheld by the court as long as they are properly drawn up and ensure reasonable provision is made for the other party.
You may not have any anxieties about your own relationship but if you are considering transferring business assets to the next generation in the family, consider requiring them to enter into a pre or post nuptial agreement first.
So, keep the business structure and ownership under review and take professional advice to put partnership agreements in place. Although it is unromantic, consider pre or postnuptial agreements for you and your spouse and other family members. Taking these steps could help ensure your business survives, even if your marriage does not.