The Family Business And Divorce: Legal Considerations For Protecting Your Limited Company

April 14, 2023
Photo by Scott Graham on Unsplash

Divorce rates are very high among people who are business owners. Studies have shown that families, where one is an entrepreneur, have a 43%-48% chance to get divorced. That number is even higher for couples that are both entrepreneurial. This often happens because these people are high-performance individuals that are focused on their work.

So, when it comes to divorce there are a couple of questions with the main being what’s going to happen with the company. Although there are many styles and structures of business in this article we are going to cover only limited companies. Remember that divorce in it is hard and losing your company is just another burden on top of that.

In this article, we are going to explain what can you do to protect your limited company and how to prepare your company for divorce.

Family Business and Divorce

First of all, the court needs to determine ownership of the company, whether the business is community or marital property. For the court to successfully determine ownership they will look over many factors:

  • Date when the business was established.
  • Whose funds were used to start the business.
  • Contribution to the business by both sides.
  • Skills that were required to successfully run the business.
  • The value that business had before marriage.
  • The value that businesses have at the time of separation.

Even if the business was established before the time of marriage it still doesn’t mean they are separate property. If marital funds were used in the business or if a non-owner spouse quit their job to help with the business it will apply a transmutation concept. The transmutation concept means that separate property becomes marital property.

Of course, it goes both ways, there are instances where if the company is acquired in the marriage it’s looked at as separate property. This happens if someone gifts a business or if the business is inherited.

How to Keep a Business in Case of a Divorce

You must have asked yourself a question โ€œIs a limited company protected from divorce?โ€. It depends if a company is determined as marital or community property by the court.

Even if it’s determined a marital property which means both you and your partner own it there are things that you can do to keep your business running.  Many of the available solutions are achieved by negotiation. Here are some examples:

  • You can buy out your partner’s interest. It can be achieved by a loan or a differed payment.
  • There is a way where you can compensate your spouse so they get a benefit from the company.
  • You can swap other marital assets for the company. For example, your spouse can get a greater share in the family home or some other thing of value.

Keep in mind that divorce settlements can take a long time so choose your position in the company carefully. We say this because if it’s a publicly traded company shares can fluctuate throughout the settlement.

How to Prepare for Divorce

Sometimes it’s late to start thinking about what could you do regarding your business. You should start planning the future of your company before it comes to divorce. We are recommending you take a look into these steps that will ensure your company stays yours when divorce happens.

  • Pre-nuptial agreements: Prenup for short, are agreements made before marriage regarding the ownership of different subjects like real estate, business, and material things. These are viable court documents that can save your company and exclude it from the marital property.
  • Don’t involve your spouse in the business: When it comes to court you need to show that your spouse had nothing to do with your business. If you were running the whole business alone, you will no doubt be the owner of it. But, keep in mind this doesn’t fully clear your business from the marital property but it sure helps.
  • Keep business finances separate from household finances: If your marital funds were used in the business in either way, your business may be subject to marital property. 
  • Donโ€™t have your wife as a company director: A lot of people are considering doing this, don’t. If you give your spouse an official position or shares in the company they can easily argue that they had a major role in running the business. Where if this happens they are likely to receive a part of the company.

All these things alone can’t ensure that your company will stay yours and that’ll be excluded from the marital property. But, all of them combined give you a greater chance of your company staying in your possession.

What Power Does the Court Have

You may ask yourself what can the court do? and how far does the court’s power stretch? Well here are all the things you need to know regarding what can court do and the powers it holds.

One of the biggest powers of the court is being able to order a spouse to sell all their shares of the limited company. This, of course, is not commonly ordered because, in the court’s eyes, this business is something that earns living for a family. So the sale of the shares would harm the family. 

Courts also can transfer the shares from one spouse to the other. This is more acceptable if a company is owned by both parties. It’s usually transferred to the one who is planning to run it in the future.

There, of course, are many more things the court can order but these two are great examples of what the court is capable of. Remember that it’s different in every situation, there are a lot of factors that go into account.

Is Legal Advice Required?

There are no legal requirements that state that you need to have legal advice during the divorce. But, there is so much on the plate when it comes to divorce and business so we say that it’s a must. Even if you are sure of your soon-to-be ex-husband or ex-wife it’s very important to know that no two divorces are alike.

You can greatly benefit from having a legal advisor by your side who can say exactly what is needed to be said. Remember that you are getting help from a legal expert who knows everything about the divorce. 

Some things legal experts can help with are:

  • โ€˜Hiddenโ€™ tax implications.
  • Identifying possible additional costs.
  • Find the least stressful way to an agreement.

Closing Thoughts

Divorce is not always a way, but if it happens be sure to protect your company. After all, you don’t need to lose both your love and professional life. Be sure to use some of the legal tips we shared with you. Even if you were ready for the divorce be sure to hire a legal expert as they can help you a lot, and believe us they are not a waste of money. 

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