The first step when dealing with financial matters during a divorce is to understand what the value of the parties’ assets and income are. Once the value of the assets has been ascertained, then negotiations need to take place regarding the division of those assets.
Assets held between the parties can be in a number of different forms, including a business. When one of the assets is a business, or a shareholding in a business, then this can increase friction as the division of shares can impact on the personal finances of both partners as well as the wellbeing of the business itself.
It is therefore essential that business owners understand how the business will be treated in a divorce in order that they can protect their own financial interests as well as the health and operations of the business, enabling them to adequately plan for the future.
The focus when looking at the division of assets is one of fairness – to ensure, where possible, that both parties have stable financial circumstances and that the settlement fairly reflects what each of them have brought into the marriage.
What is considered fair will depend upon the full circumstances of the case. The approach taken in relation to a business is not as straightforward as it is to other assets, and below we provide an overview of the approach taken.
Is a business considered a marital asset?
A business can form part of the marital assets that are to be shared on divorce. However, to what degree the business is to be shared and what this looks like in practice will depend on numerous other factors. This could include when was the business acquired, what input your spouse has had in the running of the business, if any, and what other assets and income are available between you.
It is not as simple as dividing the business equally between you. Instead, the courts will take a wider, more rounded view of the financial circumstances in the marriage. The aim is to reach a fair outcome for both parties based on all the assets available and accumulated during the marriage. In addition to a business, this can include property, pensions, investments and savings.
With regards to the division of a business in a divorce, the courts will closely consider when it was started and how it has evolved during the period of the marriage. The business will be considered a marital asset if it was set up or acquired during the marriage, or if there has been significant growth during the course of the marriage. Even if a spouse had no direct involvement in the business, that is not sufficient to ringfence the business from the matrimonial pot.
A business could be considered a non-marital asset if it was established before the marriage, but it would still be included in settlement discussions, particularly if the business has increased in value during the marriage, and the remuneration from the business funded the family’s lifestyle.
There are lots of factors to consider when looking at a business upon divorce, including the earning capacity of your spouse, other assets that are available for consideration, as well as the preservation of the business.
How is a business divided in divorce proceedings?
When considering a business during divorce proceedings, the courts are unlikely to order that the business owner should transfer a shareholding in their business to the spouse. However, they will need to consider offsetting any potential interest in the business by way of other marital assets, such as a greater share in the family home, or other capital.
In a lot of cases a business owner, for tax purposes, may have transferred a 50% shareholding to their spouse during the marriage. In this instance, consideration will need to be given to how the party wishing to retain the business can buy out the interest of the other spouse.
The courts will seek to maintain the stable trading position of a business involved in a divorce and will aim to preserve its financial health. At the same time, they have a responsibility to ensure the overall division of marital assets is fair. Complications may arise if the other spouse had an active role in the running of the business, and there is a dispute as to who is to retain the business. This is why it is important to seek specialist advice.
When dividing business assets in a divorce the courts will consider:
- Valuation – During divorce proceedings, the business will be valued. The basis of the valuation will depend upon the business, for example on net asset base or on an earnings basis.
- Contributions – The courts will consider what contributions each spouse made to the marriage, in terms of financial and non-financial.
- Needs – The financial needs of both parties going forward will be considered, and whether the other assets and income will enable the other spouse’s needs to be met without having regard to the business.
- Timing – When the business was established and the involvement in the business of the other spouse. Whether the business owner has transferred shares in the business to their spouse, and what the intention was when doing so. As a side note, professional advice should always be sought before significant steps are taken regarding the ownership of a business to enable a fully informed decision to be made.
Expert support and advice with business division in divorce
If you are currently going through a divorce and have concerns or need professional representation in relation to your business assets, contact our team at Consilia Legal today.