How are business assets divided in a divorce?
Most assets that have been acquired or built up during the course of the marriage will be added to the ‘matrimonial pot’ upon divorce, including any business assets of either spouse.
One question which is often asked is whether business assets need to be included in the matrimonial pot and if so, how can they be divided or retained?
Is a business considered marital property?
In England, Wales, and Northern Ireland, business interests will generally be considered by the court as matrimonial assets, and their value will therefore need to be added to the matrimonial pot.
This is irrespective of which spouse founded or ran the business.
But in Scotland, business interests are only counted as matrimonial assets if they were acquired post-marriage.
As such, if one party already had set up a successful business before getting married, they will normally keep those assets after divorce.
However, if the value of the business increased during the marriage, this increase in value may be taken into account and added to the matrimonial pot.
What can happen to a business in a divorce?
If the business essentially belongs to one spouse (ie they founded and managed it) the courts will normally try to ensure this party retains their business in full.
Instead of having to share the business interests with their ex, they will instead give up alternative assets (eg their portion of the marital home) as a substitute for the value of the business assets.
However, if there are insufficient alternative assets, it may be necessary to transfer a certain number of shares (in the case of a limited company) to the other spouse.
It is unlikely that the court will order a business to be sold, although it does have the power to do so.
In the case of family businesses (eg where both spouses are company directors and own an equal number of shares), the situation can be more tricky.
If the couple split up amicably, they might be able to carry on as business partners.
Alternatively, one party could retain their shares but become a ‘sleeping director’ and allow their ex to manage the business.
Otherwise, one spouse can sell their shares to a new director, or their ex can buy them out.
The same principles apply to partnerships.
If no solution can be reached, the divorcing parties will either need to sell their business or go to court and ask the judge to make a decision.
Regardless of how you decide to divide the existing business assets, you will need the assistance of a solicitor to draw up a consent order for you.
This legally binding order sets out to the court how you intend to divide up the business assets as part of your overall divorce settlement.
Applying to the court to end your financial commitments will prevent both parties from making any future financial claims, even years in the future.
Are limited companies protected in divorce?
For purposes of divorce, limited companies are not treated any differently compared to other forms of businesses such as partnerships, LLPs, or sole trader structures.
A divorcing party will only have a claim on their partner’s shareholdings in a limited company – not on the shares of any other company directors or shareholders.
How is a business valued in relation to a divorce?
It will be necessary to have a business valued before negotiating a divorce settlement.
The outcome of the valuation will determine the figure which needs to be added to the overall matrimonial pot.
The business owner will need to provide an estimate of the business value in Form E, backed up with company accounts and a letter from their accountant.
The valuation should take into account a range of elements, such as:
- Total business assets including cash reserves, property and stock
- Annual turnover and profit for previous years
- Expected profits based on new contracts
- Business debts
If the valuation estimate is not accepted by the other divorcing spouse, it may be necessary to ask an independent accountant who specialises in valuing businesses, although this can have a significant cost attached.
Is my ex-partner entitled to my business assets?
It is possible for an ex-spouse to make a claim on any assets of their former partner – including new business assets – even many years after getting divorced.
In order to prevent this from happening, one must obtain a financial settlement with a legally binding financial order or clean break order. These orders essentially prevent future claims from being made on the assets of either party.
How to protect your business assets
It is theoretically possible to try and ‘ringfence’ the assets of a business owned before marriage, to prevent them from forming part of matrimonial assets.
In order to do so, it would be necessary to keep any profits from the business totally separate during the marriage (eg putting them back into the business instead of using them to pay off a mortgage on the family home etc).
However, in a long marriage, even assets that are kept entirely separate may still come to be considered as part of the matrimonial pot by the court.
These types of agreements are essentially contracts, entered into by a couple either before or after marriage, which set out how the assets of each party – including business interests – should be distributed in the event of divorce.