What happens to your business in a divorce?
If you own a business and are about to start the process of legally ending your marriage or civil partnership, you may be wondering what happens to your business.
If you have spent years building your own business, you may presume that it technically belongs to you, or you may even be worried that your company is at risk. In this blog, our divorce solicitors explain what may happen to your business in a divorce.
Is a business considered marital property?
In England, Wales and Northern Ireland, a business that is owned by either party during a divorce is generally considered a matrimonial asset. All matrimonial assets go into a marital ‘pot’, which is considered when making financial arrangements as part of a divorce.
In short, no matter who founded or ran the business, it will be added to the matrimonial pot alongside your home, your debts and any other finances, joint or in your sole name.
Am I entitled to my husband/wife’s business in a divorce?
Not necessarily. Despite business assets going into the marital pot, if the business was founded and managed by one party, the court will normally endeavour to ensure they retain ownership. This is because the business is often that party’s sole source of income, and it would be unfair to divide it or ask them to sell it if other assets can be utilised.
Having said that, the business owner will normally be asked instead to give up or transfer another asset or assets, such as their portion of the marital home. If this is not possible, e.g. if the value of their portion of the family home is less than what their business assets are worth, existing shares from the business can be shared with the other party. In some cases, parties agree to share the business’s future income instead.
What if it’s a family business?
If there is a family business and/or both parties actively contribute to it, this can be more complex. What happens next depends on the interests and role each party has within the company and what their share arrangements are. It also leans heavily on whether the separation is amicable or not.
Valuing the business
Before any decisions can be made about how the family business is dealt with, the company must be valued. If both parties own the business, either can arrange for a valuation. If it is owned by one party, they should arrange it. This is not applicable if the business has no resale value and thus no business assets to divide.
Within this valuation, assets, earnings and the business’s structure (i.e. whether it’s a limited company or partnership) will be considered.
The valuation process can be complex and expensive, and can sometimes cause or increase existing tension between parties. It is therefore important to seek legal advice before taking this step.
How to protect your business in divorce
There is a common belief that you can ‘ringfence’ your business in a divorce, keeping it out of the marital pot. This is rarely the case, but it is possible to take measures to protect your interest in a business you own from a divorce. These include:
Using a Trust to protect your business
Putting your business in a Trust can be an effective way of protecting its legal ownership. Depending on the type of Trust chosen, this will usually transfer the business, its shares and assets from personal ownership to management by the trustees. Both tax and legal advice should be taken to ensure this is the right step for you and your business.
Shareholders’ agreements
If you own a business with anyone else, romantically or not, you should have a shareholders’ agreement. This includes what should happen if one shareholder divorces (amongst other things) and can protect you and any other business partners.
Prenups and postnups
While these are not always legally binding, the family court will normally consider pre or postnuptial agreements during divorce proceedings, as long as they are fairly entered into freely and properly drafted by a solicitor.
How our divorce finance solicitors can help
Financial negotiations in divorce can be difficult to navigate. That’s why it’s vital to seek legal advice from a specialist divorce finance solicitor as soon as possible.
In most cases, our expert team can help you agree on a divorce settlement voluntarily and in a collaborative way, through negotiation or family mediation. If this fails, we can help you apply to the court to reach a divorce settlement for you.
For practical advice about dividing marital assets, including a business, get in touch. Call us on 0117 325 2929 or fill out our online enquiry form.
