Divorce is never easy. Accepting the end of your marriage can be a long and challenging journey, and once you have finally reached the point of acceptance, you then have to worry about the financial implications that come with divorce.
Divorce becomes even more complicated if either or both parties own a business. Understandably, it can be hard to know where you stand, which can lead to further worry and anxiety.
At Brown Turner Ross, we have a wealth of experience in family law and managing divorce procedures for business owners. We can help you understand your rights and secure your assets during the divorce.
Business Valuation
Business and divorce can involve many complications, so knowing exactly where you stand is important. You should know exactly how much your business is worth, so it is important that you get a business valuation.
Getting a valuation can be costly, but whether you and your partner own a business together or not, the valuation can ensure that the divorce is fair. Complications can also arise if you are dealing with a divorce and a family business, as both parties must provide information for the valuation.
Suppose you are looking for a more affordable and efficient way to receive the valuation. In that case, an impartial financial appraiser should be instructed to act as a Single Joint Expert (SJE) to look at all of the business assets and earnings, including potential future profit.
Asset Division
The standard way that assets are divided during a divorce settlement is a 50/50 split.
The split can differ depending on circumstances and can be more or less weighted depending on associated costs such as healthcare, childcare, and other expenses.
When it comes to dividing a business after divorce, you need to determine whether it is jointly owned.
Marital and Non-matrimonial Assets
Before dividing assets, you must determine whether the business is marital or non-matrimonial. If a business is determined to be marital property, it must be divided between both parties, but if it is a separate property, the establishing party will hold control of the property.
Marital Property
Marital property is any asset accumulated by the couple during the marriage. Examples include the family home, any debt acquired through marriage, savings, and businesses.
The courts do not consider who finances these assets, and by law in England and Wales, both parties are entitled to a share of any asset acquired during the marriage. Any business bought during the marriage will have to be split equally.
Non-matrimonial
Non-matrimonial assets are any assets purchased before or after the marriage and owned only by one spouse. Any assets gifted or inherited by one spouse may also fall under this category and do not have to be divided equally between both parties.
If you owned a business before your marriage, you will not need to split the business. Still, you may need to split any financial assets accumulated by the company throughout your marriage.
A common way for people to protect these non-marital assets is through a prenuptial agreement.
Business Type
The type of business structure you own will also impact how a business is valued during divorce proceedings. If a company is more straightforward to value, it could be at risk of being split equally between both parties if it is marital property.
Sole Trader
A business with sole propriety is the easiest to evaluate because all its profits and liabilities are considered personal property. Because it is personal property, the value of the business can be determined based on any tangible assets, making it easier to divide between spouses in case of divorce.
Because the business is not a separate legal entity, it can become at risk in case of divorce and may need to be sold.
Partnership
Partnerships are more difficult to value than sole traders. A partnership does not necessarily mean that you have a 50/50 deal, so the percentage share would have to be calculated and applied across all business assets.
Divorce can have an impact on other parties that own the business, which is why clauses are often put in place to protect partners from potential liquidation.
Limited Liability Company (LLC)
In the case of an LLC, the valuation depends on the ownership percentage of the involved spouse, their contributions to the company, and any agreements previously made by existing partners.
Value is determined by the business’s assets, cash flow and market standing. With an LLC, it can be difficult for the divorced spouse to get a percentage of the assets, as existing partners usually make agreements to protect the money held within the company.
Corporation
Valuation is far more complex with corporations. A corporation is an entirely separate legal entity; if someone owns the business, it is through shares. This means that the shares need to be individually assessed.
Valuation on a corporation can become more complicated, as it requires more complex analysis, including drafting revenue projections and market comparisons.
Whether it is a closely held corporation or publicly traded company can also make a huge impact, as any additional stocks bought during the marriage could be considered to be part of the marital estate, complicating things further.
Protecting Your Business
If you are worried about losing your business due to divorce, there are some ways to protect it further. Some of these processes must be completed before marriage, while others can be completed during the marriage.
Prenuptial or Postnuptial Agreements
A prenuptial agreement is the more popular method for protecting a business. In these agreements, you outline precisely how assets will be divided in the event of a divorce, and you can protect any existing business you have or any business you plan to open.
These agreements can also be made during marriage, which is a fantastic solution in case you purchase a business or shares that you wish to protect during the marriage.
Partnership Agreements
If you have a business partnership outside of your marriage, it is essential that you form a partnership agreement. This will cover buyout policies and ensure that a business stays intact in case of a separation, preventing divorce from having a major impact on business.
Trust
If you put your business and its assets into a trust, you can protect them from being divided in case of a divorce by separating them from other marital property and assets.
Pay Yourself a Salary
A big reason why a lot of businesses are divided and liquidated in case of a divorce is the argument that it is essential to do so to prove that you can provide the necessary financial support to your ex-partner.
If you pay yourself a competitive salary, you can prove that you can provide this support without selling the business, which means that you will not need to sell off any assets or divide the business.
The Implications of Divorce on a Business
No matter if your business is a marital or non-marital asset, there is still the possibility that your business will be affected. Though seeking help from an experienced legal firm may reduce the impact, to a certain extent, it is unavoidable. Here are just some of the implications of business and divorce.
Operational Disruption
Divorce isn’t easy, and it becomes even more challenging when you add the potential loss of your business to the mix. Depending on the scale of your company and the contributions you make, it is likely that there will be instances of operational disruption.
If you focus less on your business’s operation, you could see an impact on its performance, which may lead to a loss of profit later on.
Legal and Administrative Costs
Valuing and dividing a business amidst a divorce can lead to high legal fees. This is especially the case if there has been contention throughout the process, as you may need to hire the services of several experts for advice.
Suppose you want to avoid excessive legal and administrative costs. In that case, we suggest that you collaborate with a legal team that specialises in divorce and family law, as they will better understand the process and help minimise costs.
Financial Strain
Unfortunately, no matter the business type, you will likely experience financial strain on your business when going through a divorce. You will have to pay for the valuation of the business and then pay your business accountants to help access financial data for your company.
It is also important to remember the mental impact that going through a divorce has. If you are not feeling your best mentally, it is understandable that it will impact how you apply yourself to work and so it is possible to see a decline in results.
Receive Legal Advice From Brown Turner Ross
Facing the process and potential legal consequences of divorce as a business owner can be incredibly intimidating, which is why it is best to have access to expert advice from experienced solicitors.
If you need support with your divorce proceedings or you would like further information on what you should expect as a business owner, contact the Brown Turner Ross team today.