Can a divorce have an impact on my business?

Under matrimonial law in England and Wales businesses can be deemed to be matrimonial assets. This means that if you are in the process of divorcing, your spouse could pursue a claim against a share of your business interest even if they have not been directly involved in your business’ operation.

The court’s approach towards business assets will depend on a number of factors, including:

• The value of the business in comparison to the other matrimonial assets (if any). The court will consider the current value of the business and the growth of the business’ value during the marriage.
• Whether the business has a capital value and could be sold on the open market, or if it is income generating only.
• The contributions towards the business. This will include the owning party’s contributions and whether any financial contributions came from other matrimonial assets, such as financing from joint savings or a remortgage. This will also include your spouse’s contributions, both the financial and non-financial support, such as looking after the family home or raising children.
• The needs of both parties and the children of the family. If there are limited assets the court may look to the business to help meet needs.

Where there is a dispute over a business interest within divorce proceedings the potential outcomes for settlement may include:

1. Selling the business or part of the business to raise capital and to divide proceeds between the parties.
2. Provision for you to purchase your spouse’s share of the business to buy them out; or
3. Offsetting the business assets against the other matrimonial assets, such as the family home, providing your spouse with a greater share.

These outcomes can severely impact the prosperity of a business and in some cased could cause the business to cease trading. It is therefore important for business owners to give careful consideration on how business interests can be protected.

How to protect a business in a divorce

Enter into a Pre-Nuptial or Post-Nuptial Agreement

Nuptial agreements can establish how you wish for your business interests to be treated in the event of a separation. A nuptial agreement would be of particular importance where the business interest was established or acquired prior to marriage, such as through an inheritance from family or from separate pre-marital endeavours.

Whilst nuptial agreements are not currently legally binding in England and Wales, if entered into correctly the court can be persuaded to uphold the agreement.

Understand the structure of your business

The legal status and structure of your business can have an impact on how it is treated by the Court in a divorce. For example, where an individual is trading as a sole trader it will be evident that the individual is the business.  Partnership and limited companies are more complex.  With a limited company it will be easier to separate personal and business finances through the use of a company account, whereas in a partnership, it may be necessary to renegotiate the partnership agreements with other partners in the event of a divorce.

Specialist advice will be essential to ensure your business structure offers the best protection.

Keep the business and the family’s finances separate

Intermingling business and personal finances will complicate matters. Using matrimonial monies to support the business or business monies to support the family will increase the risk of the business being treated as a matrimonial asset. Maintaining clear financial records and avoiding using the business to pay for personal expenses can help demonstrate that the business is distinct from the marital assets.

Have the business valued

In a divorce the court are likely to direct that the business be valued along with the remainder of the party’s assets. This will require a financial expert to be appointed to assess the business’ assets, debts, profits and goodwill to determine the value on the open market.  By engaging with an independent expert at the outset of a dispute it can help to avoid and/or challenge inflated valuations obtained at a later date.

Take advice on the potential tax implications

Sharing business assets can have large tax consequences, such as the payment of capital gains tax and stamp duty. By consulting with a tax advisor, you could minimise this liability by structuring the settlement effectively. For example, by paying lump sums in instalments in different tax years you can reduce the overall liability. This could be beneficial to the owner of the business to maintain cashflow.

Ways to protect a business in the event of a divorce

If you are not currently engaged in divorce proceedings and are concerned about how a divorce could impact your business, taking practical steps now can potentially protect your business in the future. These steps can include:

• Reconsidering the structure of your business and reviewing the shareholder or partnership agreements. Within these documents you can specify how you intend the shares in the business to be handled if an owner divorces.

• Putting the business in a trust. Depending on the circumstances this could shield the business from being included in a financial settlement. As this area of law is complex it will require specialist advice.

• Review the business’ insurance coverage. Insurance policies, such as key person insurance or shareholder protection insurance might help to mitigate potential risks to the company in the event of a business partner’s divorce.

How Pinney Talfourd can help

Divorce proceedings can have a significant impact on a business, which will not only affect the individual that is divorcing, but any partners and shareholder of the business. It is possible through well considered planning and expert advice that losses can be minimised. Whether you are in the process of negotiating a financial settlement or you are taking advice to prepare for the future, understanding your legal and financial options is essential. Please contact a member of our family team to book a free initial 45-minute consultation.