As family lawyers we often find ourselves dealing with cases of marital breakdown where one or both of the separating couple owns a business. Sometimes one party owns a business possibly with other third parties. On other occasions, the couple owns a business together. The question of how businesses are dealt with on divorce can become a difficult issue.
Businesses can be held in a number of different structures. Perhaps the most common is a limited company. Other common structures are a sole trader and a partnership.
Matrimonial property
One of the first things that has to be determined is whether the business is matrimonial property as defined in the legislation. If it is matrimonial property then it is “in the pot” and its value will be taken into account in a divorce settlement. If it is not matrimonial property then its value will normally not be taken into account in a settlement.
Matrimonial property is any asset that has been acquired by one or both of the parties after the date of the marriage and before the date of the separation. Exceptions to this rule are assets that have been inherited by a party or gifted to one of the parties by somebody else.
The first step is to determine whether the business is matrimonial property. If the business is a limited company which was incorporated before the date of the marriage, normally this will not be regarded as matrimonial property. This can cause significant difficulties in a long marriage where one of the parties is a shareholder in a company which was incorporated before the marriage. It may be that the company is the main or only asset belonging to either party and it may have been the couple’s main source of income. If it was incorporated before marriage, this can become problematic for the other party.
A business may have started as a non matrimonial asset, but may have become one during the course of the marriage, if the business has changed its structure or nature. Whenever a business is involved, careful examination of the business should be carried out.
Value of the business
Once a business or any part of it has been established to be matrimonial property, it then is necessary to value it at the date that the parties separated. This exercise would most often be carried out by an accountant who will require access to the accounts of the business. If the shareholder in the business is uncooperative in providing accounts, court orders can be obtained to ensure the provision of these accounts. These court orders can be expensive and indeed the cost of the accountant is often considerable.
When instructing an accountant to value a business, it is important to ensure that that accountant is a suitable person to carry out the work involved and that they are able and willing to give evidence in court in support of their findings in the future, if that becomes necessary.
Once the business is valued, that value will normally be introduced into the matrimonial pot and will be taken into account in any division of assets.
This can cause difficulties for businesses and the owners of businesses whether they are the party divorcing or another shareholder. It may mean that significant sums are required to be paid over to a spouse on divorce which can undermine the financial standing of the business.
For this reason, it is important to consider a prenuptial agreement in circumstances where parties are marrying and one party has a significant interest in a business.
Other circumstances arising may be that the two parties to the marriage are also co-owners of a business. These can be difficult cases to resolve. It may be that one party will buy the other’s interest in the business and a similar exercise of valuing the business will be followed. This exercise may also put financial strain on the business and that has to be taken into account.
Take advice
In circumstances where a business is involved in a divorce settlement, it is important that proper accountancy and company law advice is provided so that clients are aware of their rights and obligations.
Difficulties arise if one party is the owner of the business or has a controlling interest in the business and the business has been historically the main income source for the family. Limited companies are vehicles in which parties can control how much income they receive. These sorts of cases have to be handled with great care. Sometimes a persistent and tenacious approach is required in order to establish the facts.
We have had significant experience of dealing with divorces where businesses are involved. We have trusted partners who can provide expert accountancy and corporate law advice and we call upon them as and when required.
If you would like to discuss any of the above, please get in touch with our family law department
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The content of this page is for information only. It is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Gibson Kerr Ltd accepts no responsibility for the content of any third party website to which this webpage refers. Gibson Kerr Ltd is regulated by the Law Society of Scotland.