When handled poorly, divorce can result in you having to sell your business as it can be a valuable marital asset to meet both parties’ needs.A common misconception is that a business counts as a separate legal entity, hence it won’t be touched when couples divorce. This is not necessarily the case. Value of shareholdings in businesses can be considered and may form part of the ‘matrimonial assets’ to be distributed and divided upon divorce, particularly if the business was created during the marriage.
Getting specialist advice on the legal steps and the necessary legal, fair and reasonable documentation to take at the outset of marriage is important.Simple and diligent forward-thinking can help ensure that your business remains as intact as is able upon divorce. So what can be done to better safeguard your business?
1. Produce a partnership or shareholder’s agreementIf you share ownership of the business with your spouse, this contract will protect the interests of both parties by setting out what will happen to a business if disputes or divorce occurs. You can also agree to restrictive clauses which prevent a departing spouse from sharing confidential information, setting up in direct competition, or stealing clients.
2. Consider a pre or post-nuptial agreementThese contracts are entered into before or during a marriage and address how marital assets, including ring-fencing assets and business shareholding, are dealt with and divided in the event of a divorce. Such agreements are not enshrined in UK legislation and there’s no absolute guarantee of protection, but a well-drafted agreement that follows the necessary guidelines is advisable. Certainly, they provide some clarity and peace of mind whilst helping to keep costs and legal disagreements to a minimum upon divorce.
3. Keep your household and business expenses fully separateMeticulously maintain good records by carefully documenting and avoid intermingling business assets with personal assets. Also, avoid the use of the family home to secure borrowing within the business.
4. Have a good insurance policyInvest in a whole-life insurance policy to be liquidated to buy out a spouse from the business if the marriage hits the rocks, giving you the certainty of funds and some peace of mind.
5. Share ownership of the business with external sourcesA business that is 100% spouse owned will generally be treated the same as any other matrimonial asset on divorce, namely shared and divided, unless there is a strong reason not to. On the other hand, if a company is jointly owned with other partners or shareholders, the court is less likely to take steps that might damage the other stakeholder’s livelihoods.
The key to a fulfilling marriage is to form a lifetime of togetherness and you might not have considered the possibility of a breakup.If you’ve not had the foresight to undertake these measures, then that is completely understandable. If this is a case, there are a few things you can do last minute to get the best settlement possible if you do divorce. One strategy is to trade some of your other personal ‘liquid’ marital assets for the ‘illiquid’ business ownership you desire to keep. Sheela Mackintosh-Stewart is a matrimonial consultant and relationship guru. She is on a mission to make society ‘relationship-smarter’ by helping people to prevent the devastating consequences of marriage breakdowns.
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