Business ownership and divorce FAQs
The breakdown of a relationship is never easy, and can be overwhelming in even the most straightforward of cases. But it can become particularly complex when businesses ownership is involved.
In these situations, you will be need to resolve some very difficult questions, and very often you and your ex may have differing opinions as to the fairest solution.
Here are just some of the most frequently asked questions about business ownership and divorce that our family law team receive from clients who are facing divorce and wondering how their business will be affected by the split.
“What happens to my business when I get divorced?”
In England and Wales, a business interest is likely to be considered a matrimonial asset if it was established or grew significantly during the marriage. It must be disclosed as part of your financial “pot”.
The court’s primary goal is to achieve a fair outcome when looking at each parties’ capital and income needs in order to house themselves and any children. A number of factors are taken into account when the court looks at a reasonable and fair division of the assets and this could result in one person keeping a business while the other is compensated elsewhere.
For example, where one person meets their income from a business but there is more capital in the family home or other property, one person may keep the business so they can meet their income needs and rent a property to house themselves, while the other retains the capital in the owned property.
Very often, this is what the couple want themselves.
The courts prefer not to leave one person with all the cash assets and another with assets that are tied up in something like a business. Both parties, if it is achievable with the available assets, will need to have their housing and income needs met.
“My partner and I are getting married next year! What would happen to my business (which is my main source of income) if we split up. What precautions can I take to protect my business assets in case we do divorce in the future?”
Prenuptial Agreements (otherwise known as “pre-nups”) and Shareholder Agreements clarify and set out in advance how the two of you agree that your business interests (and other assets) should be handled in the event you ever split up in the future. Generally the courts will uphold the wishes set out in “pre-nups”, unless they are deemed wholly unfair, do not meet financial needs, or if it can be shown that they were signed without independent legal advice, outside of what would be the appropriate timescale prior to a marriage or under duress (or by someone lacking sufficient mental capacity to do so).
“My husband and I jointly own and have run a business together for 10 years since we founded it. What are our options when we divorce?”
When a couple co-owns a business, they have several paths:
- Buyout: One spouse buys the other’s shares.
- Offsetting: One spouse keeps the business, while the other receives a larger share of other marital assets.
- Co-existence: Continuing to run the business together. This is rare and requires an amicable relationship post-divorce, which can often be difficult and only becomes more difficult with the added complication of business and financial matters.
- Sale: Selling to a third party and splitting the proceeds (usually a last resort).
The courts generally prefer a clean break and so they usually favour either the buyout or offsetting option, to ensure the business remains a “going concern”. This will also assist at least one party in meeting their income needs which is one of the factors the court must take into account when considering a fair and reasonable financial settlement.
It must be remembered that a business might not always be viable, that there is not always enough money by way of capital or income to go round, and it is therefore important to get independent legal advice and full financial disclosure at the outset of any separation or divorce.
“My husband owns a business he set up while I gave up my career and stayed at home to raise our children. What am I entitled to?”
Our law recognises that marriage is a partnership of equals. Giving up a career to raise children and manage the home is viewed as an equal contribution. One that allowed the other spouse to focus on the business.
You may be entitled to a share of the business value, in order to meet capital or income needs, depending on circumstances and what other assets are available.
“Is my spouse entitled to half my business on divorce?”
While a 50:50 split is the starting point for assets built up during a marriage, it’s not an automatic rule. The court looks at what is fair based on individual needs, the length of the marriage, and contributions. If the business existed before you met, it might be partially protected, but any growth during the marriage is likely to be shareable.
If you and your ex own a business outright, or you have a significant shareholding in a business, it will normally be valued so it can be considered as a part of the final financial settlement in the divorce.
For shared business interests, either of you can arrange a valuation. Generally, if one of you owns it – outright or with others – they must ask for the valuation. This process isn’t always so simple, particularly if the business is privately owned.
Valuing a business depends on the following key factors:
- assets: for example property or stock that it owns
- earnings: the profit it’s expected to make in future
- structure of the business: whether it’s a limited company, sole trader or partnership.
Valuing a business can be complicated and requires an expert to be instructed, which can cost several thousands of pounds. Before you arrange for an expert like this, it’s sensible to take legal advice.
“How will our holiday cottage or Airbnb business be dealt with when we divorce?”
We often deal with divorcing couples who run a holiday let business.
The key point to take into consideration here is that holiday let and Airbnb businesses are often treated as “capital-heavy” assets. The court will look at the property values, the income generated, and whether the business was run as a commercial venture. If it is the family’s primary source of income, the court will try to preserve it, perhaps by allowing one spouse to keep it but this could require splitting properties, with some being transferred to each party so they can both generate an income or house themselves within one of the properties .
“Will a limited company be protected from divorce?”
While a limited company is a separate legal entity, the shares you own in it are personal assets. Therefore, a limited company is not automatically protected. While the court cannot usually order the company itself to sell its equipment or property, it can order you to transfer your shares or pay a lump sum based on their value.
“What happens if I am a director of a company?”
Being a director means you have legal responsibilities to the company. But for divorce purposes, the court focuses on your shareholding and the income you receive. If both spouses are directors, the court may order one to resign as part of a clean break settlement.
“How are shares in a company dealt with in a divorce?”
Shares are valued by a professional, often a forensic accountant, to determine their current market value and the income they generate. The court can then order a transfer of shares to the other spouse or a buyback where the company itself purchases the shares.
Do you have more questions about business ownership and divorce?
Hopefully these business ownership and divorce FAQs are a helpful start and will allay some of your initial worries or fears. Of course, every divorce case is unique, and there is no one-size-fits-all solution for couples and families going through this process.
So, if you are currently considering divorce and would like our help and advice then contact us for a free consultation with one of our family law team.
Call us today on 0333 888 0404 or email [email protected]
