In the event of a divorce, what happens to the business?
In a divorce or property settlement, any investment in a business or company might be deemed property. It makes no difference what type of business structure it is, whether it’s a partnership, a sole trader, or a corporation. As an asset, this interest must be appraised in order to be included in the property pool. You should be informed of the company’s corporate structure and control, as this will determine how the company will be handled in the event of a separation. As a result, it’s critical to retain accurate and up-to-date records.
When one or both spouses own a business, it is a marital asset that must be divided. There are a few exceptions to this rule, though. To begin with, the business is not subject to a property settlement if the couple signed an enforceable agreement (such as a prenuptial agreement). Second, because the enterprise is held in a structure and is not personal property, it may be excluded (such as a trust).
Otherwise, after separation or divorce, marital assets are distributed according to a four-step test. These steps define what constitutes a just and equitable property division by:
- Identifying the worth of both couples’ assets and obligations;
- evaluating each spouse’s financial and non-financial contributions;
- considering each spouse’s future requirements;
- and determining whether the distribution of property is just and equitable in all situations.
It’s crucial to note that Step 2 of this procedure considers a variety of criteria, including each spouse’s non-financial contributions to the partnership (such as parenting and maintaining a home). This means that even if a spouse did not work in or fund the business, he or she may be entitled to a portion of the company in the event of a divorce or separation.
The above-mentioned marital asset test determines what share of the property pool each spouse should receive. For example, depending on each party’s contributions and future needs, the division could be 50/50 or 60/40.
When a couple gets divorced or separated, how are business assets divided?
The form or structure of a business determines how a business asset is distributed in a divorce or separation.
In the event of a divorce or separation, dividing a sole trader business can be difficult.
A sole trader, such as a tradesperson or professional consultant, is typically a ‘personal’ type of business, with few, if any, employees other than themselves. Despite this, a business value must be determined. The bulk of the time, the business is managed by the individual with the necessary skills and experience. Normally, a business’s value is mainly based on the individual’s personal reputation. As a ‘value to the owner,’ a reasonable value is usually assigned to such a business stake.
In the event of a divorce or separation, dividing a partnership business can be difficult.
If two partners own a business, they have the option of continuing to run it. However, in most circumstances, one partner will buy out the other, or the business will be sold altogether by the partners. The value of a business and family law principles determine how much each partner receives.
Divvying up a PTY LTD in the event of a divorce or separation
If a company is formed, what happens to it in a divorce is determined by whether it is a family business or has third-party shareholders. If it’s a family business, it’ll be considered as if it were a partnership between couples. If the firm has third-party shares, the value of the company’s shares must be assessed before they may be included in the property pool. The business and its structure determine what happens to those shares and the company as a whole.
The process by which the family court makes its decision
You can apply to the Federal Circuit and Family Court of Australia to make a decision for you if you are unable to achieve a private agreement about the division of marital assets or the worth of a business. If the parties cannot agree on a value for their business, the Court will almost definitely order an independent valuation. This appraisal will be used by the Court to determine each party’s claims to a fair asset divide.
The Court will also be hesitant to make an order involving a former couple’s ongoing financial entanglements. If it is required to secure a fair and equitable split of property, the Court will order the firm to be sold. This will not be necessary if the Court can allocate other marital assets to accomplish an equitable property divide. For example, one spouse may preserve a lucrative business while giving up complete ownership of the family house.
How do you determine the worth of a business in the event of a divorce?
Reaching an agreement on the business’s worth can be a major roadblock to completing a property settlement.
A market appraisal can easily evaluate an asset such as a house, but evaluating a business is fundamentally more complicated. Despite its inherent difficulties, deciding on a business value is a necessary step if a divorcing couple wants to avoid going to court.
To assess the genuine value of a business is usually required to hire a business valuation expert. A professional business appraisal can help to clarify the property settlement process. The majority of these individuals are Certified Valuation Analysts (CVA), Accredited Senior Appraisers (ASA), or Certified Business Appraisers, and/or are accredited in Business Valuation (ABV) (CBA).
Without bias or partiality, the independent valuer must produce an accurate estimate of the business value. The worth of a company is determined by a variety of criteria, some of which are highly complex and need a detailed examination of the company’s financial records. The date of the property settlement or court hearing, not the date of the couple’s separation, determines the value of a business.
In most cases, an independent valuation differs from a potential open market sale price. Rather, the value takes into account the benefits that the owner would obtain if they kept their stake or involvement in the company. For example, if one spouse is able to continue in the job of CEO, this is an additional benefit that must be factored into the valuation.
So, what can you do to safeguard your company?
You’ve probably heard of a “prenup” — it’s possible you’ve seen one on one of those American legal dramas. In Australia, we don’t have “prenups,” but we do have “Binding Financial Agreements.”
A legally binding financial agreement is a contract that both of you have signed. A Binding Financial Agreement can be written before your wedding before you start cohabiting, or at any time before you separate or divorce.
The Binding Financial Agreement specifies what property will be considered separate property and thus retained by the person who brought it into the relationship, as well as what property will be considered relationship property and thus divided between the two of you, in advance of divorce or separation. In the case of company ownership, the Agreement can reflect your understanding that you will keep the business if the relationship ends because you owned it before you met, or because you have been the one who has put all of the efforts into it.
The following must occur for a Binding Financial Agreement to be effective:
- The contract must be written.
- It must be entered into voluntarily and without coercion, and complete disclosure (no assets or obligations hidden) must be provided.
- It must be signed by both parties, and both parties must have gotten independent legal advice prior to entering into the agreement – to explain the arrangement, ensure their understanding, and sign a Certificate of Independent Advice.
However, there are several disadvantages to such a pact. Talking about a binding financial agreement can be awkward and unromantic at best, and might be perceived as a questioning of the relationship or marriage at worst. Furthermore, depending on changes in circumstances since the beginning of the relationship – such as the addition of significant other assets and liabilities, the introduction of children, or simply having a long marriage or relationship – a Binding Financial Agreement may be contested after divorce or separation (i.e. they are not bullet-proof).
A Binding Financial Agreement, on the other hand, might be thought of as a form of insurance policy, similar to home and contents insurance — you hope you’ll never need it, but if that flood comes through and ruins everything you own, you’ll be glad you have it.
How to Reduce the Risks
Separation can often be a relief for a couple, and the unusual immediate aftermath may be a better relationship with your soon-to-be-ex-spouse. That may not last, and many lawyers urge the less-involved spouse to exit the business as soon as feasible and cleanly. Both partners may have a vested interest in the business’s future viability. If you’re running it together, the difficulties of negotiating a property settlement may make it tough to collaborate on company choices as effectively as previously. Customers may be concerned about the future of a business partnership, while employees may be concerned about their job security.
The aim is to maintain access to financial data.
One spouse may try to keep the other from getting the facts needed to fairly evaluate the business or, even worse, divert assets. If the couples apply for business financing together, subsequent business success will influence both of their creditworthiness, even if one of them is no longer involved. If a self-managed superannuation fund exists, dividing it raises unique legal challenges.
The appraisal and division of assets in a divorce are frequently misunderstood.
The assets of a business will be valued at the time of settlement or court hearing, not at the time of separation, which is another incentive to maintain the business strong as the divorce proceedings move. If a business has minimal value but generates revenue, it will be considered a financial resource available to the relevant spouse. After divorce, spouses who have given up jobs to care for children but have the ability to find suitable employment may be forced to return to work. Apart from child support, the other spouse may not be forced to contribute further maintenance. These are all reasons to obtain legal counsel as soon as possible, even if you are considering divorcing.
Get Legal Advice Early
It’s what you might expect on a website of this nature, but couples who are parting ways when there is a business involved often have a significant amount of stress on their plate. That stress will become seriously exacerbated in circumstances where either one of the couples delays getting legal advice. The best time to get such advice is prior to separation. Your lawyer at this juncture will be able to fully prepare you for the road ahead and ensure that any business that is involved is well and truly considered in its entirety in property settlement matters.