How Can I Protect My Business From Divorce?
The court’s approach of dividing assets can be equitable in the case of personal finances but may cause a lot of mess and/or unfairness in the case of businesses. Unlike cash or assets, a business cannot be neatly split in half and their liquidating could be fatal to your ventures.
While your business cannot entirely escape the eye of a divorce settlement, there are definitely ways to mitigate the damage done to it. This article will explain how you can prevent tricky situations from occurring. If you are recently divorced, the second part of this article will explain how you can best protect your business from further fallout.
The easiest way to protect your business in the case of a divorce is to sign a binding financial agreement (BFA) (otherwise known as a prenuptial, or prenup agreement) with your spouse before, after, or during marriage. A BFA is a legally binding agreement that records what assets and debts both partners bring to a marriage and details how they are to be divided in the case of a divorce. Financial agreements need to be created with both partners seeking independent legal advice and are subject to strict guidelines by the Family Law Act. Financial agreements are enforceable by the court but can be challenged in limited circumstances.
Here, you can include arrangements for your business within the agreement. This can include assigning the entirety of the business to one member in the event of a divorce, or include a term for a division of the business done in a way that minimally impacts its operations. This can feel like an awkward step and conversation to have. However, be mindful that close to half of marriages end up in divorce, and there’s no reason why issues in your personal relationship should also jeopardise a business you started before the marriage.
Approach the conversation with the mindset of preparing for the worst-case scenario – hopefully you will never have to rely on the agreement! Financial agreements can provide certainty to the business and even to your relationship, having set out expectations for each other beforehand.
The complexity involved in business ownership in the case of divorce settlements often comes down to determining the contributions of spouses in a business. Where the court views your spouse to have had a large stake in your business, your business is at a greater risk of being broken up to satisfy an equitable property division. Creating a formidable business structure can help prevent this. There are three main methods to accomplish this.
Do not employ or include your spouse in your business
This is the simplest preemptive step to reduce complexity in the future. Avoid employing your spouse, including them as a business partner or aiding you in any way which maintains and grows the business. Without financially contributing to the business, it is harder for them to claim a stake in it.
However, note that the court also considers non-financial contributions to be meaningful. For example, if your spouse raised your children while you ran the business that could still raise an issue of contribution.
Separate your personal and business life
If the involvement of your spouse in your business is inevitable, separating what’s business and what’s family can help prevent erroneous divorce outcomes. Make a separate bank account for yourself and your business. Don’t conflate your business debt with any mortgage repayments or bills you have. This will make it easier for the court to evaluate your business and determine your contribution.
It can also be useful to pay yourself a salary that is at the market rate if you are running a company. This will prevent any future allegation that you have used business money for personal gain, or conversely, family resources for your business.
Accurately track all your financials
Keep accurate financial records including an account of all your assets, liabilities and other important financial details. This helps the separation between your personal and business life become more formal. Additionally, it prevents any overvaluation of your business, which can be costly if the court orders a division of assets based on an exaggerated projection of your business’ value.
Disengaging from the Business
It is advisable for the partner with a lower stake and contribution to the business to disengage from its operation. To help convince your former spouse, it can be useful to explain that this is a practice that is mutually beneficial. Having a divorced partner step out can prevent future complexities and/or disagreements in a business relationship. Furthermore, a business with the involvement of a divorced couple can reduce the confidence of investors and customers and make employees uncomfortable. Where the valuation of the business is important to both parties, removing the business from the aftermath of a divorce can avoid any detriments to its operations.
Avoid Going to Court
If possible try to resolve any divorce settlements with regards to your business outside of court.
Litigation can be extremely messy and expensive. Any solution found by the court is out of your hands and can often end in an inelegant outcome for your business.
To avoid going to court, remember to be amicable and reasonable when engaging with your former spouse to enable cooperation and agreement.
Alternative dispute resolution (e.g. mediation) can be useful in arranging outcomes that don’t destroy your business. For example, you can come to an agreement that swaps another asset you own (e.g. a house) for the business. Furthermore, you can come to an agreement to buy out the business by borrowing money or leveraging the future profits of the business. This will prevent the outcome of having to sell the business off.
Protecting your business from divorce can be a complex process and often requires preparation and discipline. Navigating a prenup agreement or evaluating your business structure can be a struggle for individuals and should come with legal advice. Consulting a lawyer can be useful if you want to smoothly handle any divorce proceedings. Feel free to contact us via the form to talk to a family law specialist.
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