FAMILY LAW

Business and divorce: what to know if going into business with your spouse

If you are considering going into business with your spouse, or getting them involved in your existing business, there are family law implications if you later get divorced which should be considered from the outset. I consider how the courts may treat business assets in a divorce, what agreements can be put in place upon going into business and the implications of taking on your spouse as an employee.

Going into business with your spouse

When going into business with anyone, you should regulate your business relationship by way of a Shareholders’ Agreement (if setting up a private company) or a Partnership Agreement. These agreements can include details of each parties’ percentage share of the business, how profits will be split and whether shares/ownership can be transferred (and, if so, how).

Business owners often think of a scenario where their business partner wants to leave and sell their shares; they build in protective restrictions or requirements. For example, restricting the  leaving partner from selling to a competitor, or giving the remaining partner a right of first refusal.

What happens when your business partner is your spouse and you are going through a divorce?

Divorce between business partners can be managed through a Shareholders’ or Partnership Agreement but it is important to note that it may not be binding. Family law focuses on the needs of each party when they divorce and, although the starting point is a 50/50 split of all matrimonial assets (including business assets – generally), one spouse could end up with a greater proportion if they have greater needs or fewer resources.

The family courts have a duty to achieve a ‘clean break’ as soon as possible.. It is rare that a court would consider it appropriate for a couple to continue working together after divorce, and the couple would likely need to be very amicable. In all other cases, the spouses would need to consider how the business should continue forward, for example:

  1. Should there be a buy-out? Is that affordable and achievable?
  2. Should another asset off-set one spouse’s interest in the business, for example, the family home?
  3. Should the business be sold or divided? Is that possible/financially viable?
  4. If one spouse is a key employee and they are leaving, how would they be replaced?

If there are sufficient assets available to the parties such that the business can continue, that would likely be encouraged by the court so that both parties do not have to “start again”.

How can you future-proof your business in case of divorce?

  • Firstly, have the conversation with your spouse. It is easier to discuss these matters early, rather than when you are in the midst of a relationship breakdown.
  • Secondly, take legal advice from a corporate lawyer who can draw on the experience of family lawyers to create or update a Shareholders’ or Partnership Agreement.
  • Explore what the business might look like in the event of divorce and include specific clauses around this – for example:
    • buy-out provisions,
    • restrictions on the involvement of future spouses without agreement (e.g. in the case of remarriage),
    • what would be communicated to the business
    • how the business relationship would work pending any settlement.

Shareholders’ Agreements can also cover other matters (which are not necessarily related to separation) such as what happens if a shareholder dies?  What if one party wishes to sell the business?  Can they force the other shareholders to sell?  Who makes key decisions about the business? Having an agreement in place is good business sense and considering the implications of divorce early is an added layer of protection for the business.

Employing your spouse in your business

It is very common that business owners might employ their spouse to assist with the running of the business, but also for tax planning purposes. What does it mean if you then divorce a spouse you have employed in your business?

Firstly, it does not matter whether the spouse is working for their income. If they are an employee of the business and receiving income, they will have all the usual rights of an employee (subject to how long they have worked there) and cannot be dismissed without considering the extent to which they may have a claim against the company as an employee. Any exit of an employee spouse should be carefully managed with advice from Employment and Family lawyers to minimise such risks. Do note that if the spouse is not providing any work for the business in return for their income, HMRC may view this as potential tax avoidance by the business owner (by reducing tax that they would otherwise have paid themselves), and specialist tax advice should be sought before putting such structures in place.

Additionally, if the spouse has been receiving regular income from the business, they could be reliant on it and if it is withdrawn, they could potentially make a claim for ‘Spousal Maintenance’ if they cannot otherwise afford their outgoings. Spousal Maintenance can be negotiated, reduced and curtailed, so it is worth discussing your options with a Family lawyer.

Obtain legal advice

Going into business with a spouse can be rewarding, but it is important to keep a business head on when setting up and consider the implications should the relationship break down. The best way to protect your business is to contact an experienced professional who can tell you what you do not know. At DMH Stallard, we have a wide-ranging legal team to cover all aspects from setting up business contracts, understanding employment rights of spouses and the division of business assets upon divorce. If you need help, please call us on 03333 231 580 or email enquiries@dmhstallard.com

FAQs:

  1. Is my husband/wife entitled to half of my business on divorce? (answer includes both whether they are in business together or not)

Yes. All assets go into the “pot” for consideration, but you can make arguments that it should be excluded from the pot, for example, if it was a business created pre-marriage, your spouse has had no involvement in the business and they have had their own full time job throughout.

  1. Can my husband / wife take half of my Limited company?

Your shares in the limited company could be considered a matrimonial asset and the starting point would be 50/50 division. This is not the end point, and legal advice should be sought as each case is different.

  1. How is a business valued during divorce?

A report should be undertaken by an expert and recent accounts for the business should be provided, with projections for the next year.

About the authors


about the author img

Amber Matheson

Associate

Handles divorce, finances, cohabitation, separation, child arrangements, and relocation cases.

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