Protecting Your Family Business in Divorce Proceedings
When you own a business, it can be hard to protect your livelihood from a whole range of things, such as competitors, bad debt and slow payers or malicious online reviews.
When you are an SME business owner going through a divorce your attention may turn to protecting your family business from your spouse in the divorce and financial settlement court proceedings.
In this article, our Family Law Solicitors look at how you can protect your business during a divorce.
Online and London Family Law Solicitors
For family law legal advice call the expert London family lawyers at OTS Solicitors on 0203 959 9123 or complete our online enquiry form.
Our lawyers speak Arabic, Armenian, Farsi, French/Mauritian Creole, Spanish, Tamil Tagalog/Ilonggo, Urdu/Punjabi
Why is family law relevant to a family business?
You may think family law is not relevant to your business - even if your husband or wife is a company officer, shareholder or employee.
If you are a shareholder in a limited company, you may assume that your shareholder agreement will deal with any shareholder dispute with your spouse over the future of the company or, if the dispute escalates, company law will provide the solution. If you are in partnership, you may assume your partnership agreement will govern how your business operates and is governed.
If your spouse is not a shareholder or partner in the family business you may think that the business will not come into the divorce financial settlement.
If your partner is employed by the family business you may believe that their rights are governed by employment law rather than family law or that they do not have employment rights as there is no employment contract.
Family law and financial court orders are relevant to your business whether or not your husband or wife is:
- An active shareholder or partner in the family business
- A shareholder in name only as a vehicle for tax-efficient dividend payments
- An employee who works in the business
- An employee who is ‘on the books’ but does not play a very active part in the business
- Not associated with the family business
Is your business holding a family asset?
In financial settlement court proceedings, your interest in a family business (shares, partnership or sole trader) can be classed as a family asset or a non-matrimonial asset. This applies whether or not you are in business on your own, with your spouse or with third parties.
If your company shares, partnership or sole trader business is deemed to be a family asset it can be shared or its value can be taken into account in the divorce financial settlement.
If the business is classed as a non-matrimonial asset, it can still be shared or its value taken into account but only if it is necessary to do so to meet either a husband or wife's reasonable needs and those needs cannot be met through the sharing of the family assets.
What orders can the divorce court make when there is a family business?
The family court has the power to order:
- The sale of the business or a shareholding
- The transfer of shares or ownership in a business
Where one spouse is the owner of the family business and the only one who works in the business the court is unlikely to order the sale or transfer of the business and is more likely to order:
- The spouse who is not a business owner gets a bigger share of the non-business assets. For example, the equity in the family home or savings
- Depending on the value of the family business and the other assets, the business owner pays their spouse a lump sum to reflect their ability to raise funds from the value of their company shareholding
- That the business-owning spouse pays the other spouse ongoing spousal maintenance if there will be an ongoing large income disparity between the couple and the business-owning spouse cannot raise a lump sum or offset the value of the business as part of the divorce financial settlement
If both husband and wife are business owners the court will look at whether both play a part in the business. The court could order one spouse to transfer their shares to the other spouse.
In some families, there is a recognition that whilst the marriage may be over it makes financial sense to remain in business together. This should be the subject of careful negotiation and the family court should be asked to make a financial consent order complimented by a detailed shareholder agreement.
Protecting your family business in divorce proceedings
The best way to protect your family business in divorce proceedings is to enter into a prenuptial agreement or postnuptial agreement with your spouse (together with a detailed shareholder agreement or partnership agreement if they are a business owner). The protective measure will not work if you are already married (prenuptial agreement) or if you are in the process of separating or divorcing (postnuptial agreement).
If it is too late to think about an agreement the other steps you can take are:
- Make sure your business is classed as a non-matrimonial asset if a case for that can be argued. For example, if you inherited your shares in a multi-generational family business from a parent or grandparent or if you set up the business before your marriage
- Make a case to say that the pre-marriage value of your business should be ring-fenced and only the increase in the value of the business post-marriage should be factored into the divorce financial settlement. This may assist you if you have been married for a relatively short period or if the business has suffered a downturn in value. For example, since Brexit or the cost of living crisis
- Ensure that the business is accurately valued. For example, if you are a minority shareholder with limited voting rights under the shareholder agreement your shares will not be as valuable per share as a shareholder with control of the company. For example, if the business has been historically successful because of commercial contracts but those contracts are coming to an end and will not be renewed by a third party. For example, if there are changes in the sector you are operating in, such as a new competitor, increased overheads or a change in technology or the latest trends in the market
- Get an accountant to work out the tax implications of the share or transfer of your interest in the family business to ensure that the net rather than the gross business value is taken into account in the financial settlement
- Argue that your business assets are inherently risky and should not be valued pound for pound with other assets such as equity in the family home or savings. That argument may work with goodwill value but will not work if most of the value in your business is commercial property from where your business operates from or the value derives from cash in your business account
- Make sure that your financial court order includes any potential employment law claims if your spouse has not yet resigned from their employment in the family business or that the court order specifies if your spouse will be liable for any tax implications of the sale or transfer of their interest in the business
Specialist Family Law Solicitors with experience in divorce and family proceedings involving family businesses can help you negotiate a financial settlement or represent you in a financial settlement application where there is a family business that forms part of the family dispute. Whilst it is unlikely that the family court will order that your family business is sold or transferred you do need to be ready to present your case to argue the value of your business and how you want your business interests to be factored into the financial court order.
Online and London Family Law Solicitors
For family law legal advice call the expert London family lawyers at OTS Solicitors on 0203 959 9123 or complete our online enquiry form.
Our lawyers speak Arabic, Armenian, Farsi, French/Mauritian Creole, Spanish, Tamil Tagalog/Ilonggo, Urdu/Punjabi
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