The law treats a business as an asset, making its ownership significant in financial matters related to divorce.
David Connor is a director at WHN’s Rawtenstall office and leads the firm’s services for individuals and families. He shares key advice on protecting your business in the event of a divorce.
A key aspect in determining how a business is viewed in divorce proceedings is how it is structured. It could be run by a sole trader, as a partnership, limited liability partnership or limited company. A trust can also be established to operate a business.
Even though a business may be a separate legal entity from the parties to divorce and this legal entity may well own the business assets and contracts, the business itself is not immune from financial matters within a divorce.
You may own the business jointly with your partner or you may own it with others. Either way, dealing with a business in divorce raises significant issues which need to be considered.
The value of the business
The business’s value is key when looking at financial remedies. There are several differing methods to give an idea of value and doing this can be a costly and time-consuming exercise.
Generally, but not always, the courts prefer to maintain the existence of a business, but that may mean finding other assets or methods to compensate for its value. That could include paying spousal maintenance, especially where both parties have a hand in the running of the business and it has been their source of income.
If such methods are not possible, the business may need to be sold.
Important considerations when forming a business
On the formation of your business, you may wish to think about who should be involved in its management.
Appointing your spouse as a co-partner, director, company secretary, or shareholder may be attractive but could have consequences down the line. If they have played a legitimate role in the development of the business, this could increase arguments about a claim over the business in the event of a marriage breakdown. It may also give them employment rights.
For limited companies, things like bespoke shareholder agreements and articles of association can have clauses which deal with what should happen on separation or divorce. This may provide buyout options, particularly where companies or businesses are jointly owned by both spouses.
There may be information setting out the different classes of shares for a limited company and the rights that go with them. In other cases, a bespoke partnership agreement may help.
Nuptial agreements can be a useful method to stipulate how assets are to be divided in the event of divorce, including how the business will be dealt with. They are not automatically binding, but where there is appropriate disclosure, separate advice and the outcome is seen as fair and reasonable, then the courts are likely to enforce them.
Trusts can sometimes be used as a structure to run a business. The trustees can own the business assets, and the trust document can state how profits are to be determined. They do have tax consequences, so advice is needed upon a structure of this nature.
Structure is key
As can be seen, there is no one-size-fits-all method that can work for everyone. Thought needs to be given to the structure when a business is being established. That is: sole trader, trust, limited company, limited liability partnership or partnership.
Thought must also be given to the documentation needed to support this. That could be a partnership agreement, shareholder agreement, articles of association or trust deed.
When thinking of getting married, consider if a prenuptial agreement setting out what should happen to the business interests is appropriate. You can also enter into nuptial agreements after marriage.
Above all, seek expert advice along the way. WHN has a team of family law specialists who can assist with nuptial agreements and specialists who can advise on business structures, trusts, company, formation, and associated documentation.
David specialises in all areas of family law and represents individuals seeking to resolve family law matters either by agreement or through court proceedings where necessary.
He has particular expertise in financial settlements in divorce and separation, especially high-value cases, those involving business interests and agreements where assets may be at risk of being removed or dissipated.
For further information on protecting your business in family law matters, call David on 01706 225621 on email him at david.connor@whnsolicitors.co.uk.
