Business ownership can add an extra layer of complication when it comes to dividing assets in divorce and separation. Kate Barber of the Thrings family law team takes a look.
There are many situations where ownership of a business might complicate the process of divorce or separation. You and your partner may own a business together, one of you may own a business alone or with another person or people, or you may each have your own company or companies.
Whatever the permutations, during the process of divorce or breaking up a civil partnership, you will need to reach agreement on the value of the business or businesses, and how to divide this between you. So – how are businesses treated during the divorce process.
When does a business qualify as an asset of the marriage?
This can be a difficult question to answer, as it depends on factors including the length of the marriage, whether there are children of the marriage, and the extent of the involvement of each spouse in the business’s profitability.
Businesses that started or were bought during the marriage will usually be thought of as ‘matrimonial property’ for the purposes of divorce. However, if you or your partner owned a business before you were married, and that business has increased in value during the marriage, it becomes more complicated. It may be that only the increase is treated as a matrimonial asset.
Are businesses treated the same as any other asset in divorce settlements?
In some ways, businesses are treated like anything else you own as a couple – such as a house, or car, or furniture. So, they are usually included in the long list of assets to be shared in the divorce settlement – even if only one of you was actually involved in the business.
The value of the business will be taken into account just like properties you may own, or money you have saved in the bank. It doesn’t necessarily mean the business is sold and physically shared between the spouses going forwards. If it makes commercial sense, one party can retain it going forward, but the business asset will be offset elsewhere in the settlement.
However, determining the value of that business is much harder than it is for other kinds of assets – and a lot can depend on the specifics of how the business is owned.
What kind of business could you or your ex-partner own?
When it comes to valuing a business, and working out how it should be dealt with upon divorce, a lot can depend on the structure of that business:
If the business is a sole trader
It’s most straightforward if the business is a sole trader where the owner controls the business and is personally responsible for its operation and everything owns. In this case it is relatively straightforward to assess the business’s income and profitability. A valuer will also want to take into account anything that business owns – for example property, equipment and vehicles.
If the business is a partnership
If the business to be valued is a partnership – either between you and the partner you are divorcing, you and others, or your partner and others, things can be more difficult to unravel. There may or may not be partnership agreements that help clarify the nature of the ownership and whether a partner has a controlling interest. Valuing partnerships can often be complex and it is very likely that you will need specialist help to unpick the external factors at play and potentially the liquidity for the spouse involved with the business .
If the business is a limited company
You or your partner may own all of the shares of your company, separately or together (for example, shares are often distributed between spouses for tax reasons). If this is the case then valuation could be relatively simple.
However, if third party shareholders and directors are involved, you will be in a much more complicated situation.
It is important to consider the effect any transfer of shares may have on other directors and shareholders in the business to ensure that decisions taken to reach a divorce settlement do not have negative implications for the business.
How do courts tend to deal with businesses in settlements?
Wherever possible, if one of a divorcing couple owns a business, the courts usually support keeping that business with them, and their spouse is compensated with a share of other assets or a financial settlement. However, other solutions can involve agreeing a portion of future income to be shared, or dividing up shares if it’s a limited company. Sensible legal representation will always look at the commerciality of the settlement on your business or that of your spouse, to ensure that any settlement is workable in reality and does not disproportionately impact the business operation.
Remember, every couple, and every situation, is different – so there are no hard and fast rules and nothing can be assumed. This is why it is important to get bespoke legal advice and specialist valuations during the process of divorcing.
The family law team supports couples, families and business through a wide range of services including pre-nuptial agreements, divorce and separation and mediation. Find out more here.
