Don’t let your business become just another a pawn to be negotiated in a divorce settlement. As a business owner, you work hard to nurture and grow your business from the ground up. Likewise, you ought to extend the same work ethic to ensuring that you take requisite steps to protect your business from potential future loss, including a marital breakdown. If not, you run the risk of your spouse laying a claim against your business and/or future profits. In Lambert v. Lambert, the Court of Appeal decided that when it comes to determining what contribution a spouse makes in a marriage, it would be unfair to deem a working spouse as making a more valuable contribution than a non-working spouse. This is because a non-working spouse may have sacrificed their own career plans for the benefit of his or her spouse and children. As a result, the court ordered a 50/50 split of Mr Lambert’s £20 million pound business. This is why the best recourse available for business owners is to take proactive steps to protect your business in the event that your marital bliss comes to an end.
It can come as a shock to many business owners to find out that their business, which their spouse may have had no part in whatsoever, is regarded by the courts as matrimonial property, and therefore subject to division between the parties upon divorce.
There are however a number of steps you can take to protect your business assets in the event of divorce. The key is to speak as soon as possible to a firm of solicitors who, like Grayfords, understand small businesses and divorce.
Generally, it is a good idea to avoid co-mingling business and personal assets. This will help to demonstrate that it was your intention to keep your business separate from your martial property. So keeping excellent financial records is a must for your business. Similarly, always ensure that your family’s needs are put first by paying yourself a good salary and avoid using family bank accounts for business-related purchases. If your intention is to retain 100% ownership of your business, then you should be amenable to give up other family assets such as vacation properties, pensions, etc. Sacrificing another asset in its entirety to your spouse upon divorce may be a fair way for you to keep your business property intact. Also, when you are determining the value of your business, always use a mutually agreed upon financial expert to get a fair valuation.
Prenup or Postnup?
Entering into a pre-nuptial agreement can be a wise decision, especially if your business is established prior to your marriage. If you are already married then a post-nuptial agreement can serve the same purposes. Both agreements set out how property should be divided upon marriage breakdown, increasing certainty and making it easier to stay out of court. And although not currently legally binding in the UK, in the event that court intervention is required, the agreement can be very persuasive evidence for a court and a strong influencing factor when it makes its decision. A word of warning though, any agreement must be kept up to date in order to be of any use to a business owner. An agreement when you are starting out in business and marital life may not be valid once the business and the family has grown.
Beyond the Basics
As a business owner, there are some more creative legal measures you can use to protect your business. For example, you can opt to place your business in a trust which can afford you protection because the trust becomes the owner of the business.. But beware, recent case law suggests any beneficial entitlement in the companies through a trust can be subject to division upon divorce – consult a lawyer to ensure any trust mechanism is correctly set up to meet your needs.
You may also wish to speak to an insurance advisor to set up a policy which would have a cash out clause in the event that you need to buy out your spouse’s share of the business. If you own a business with other partners who are not your spouse, it may be helpful for all of you to enter into partnership agreements which stipulate what should happen in the event of a status change of one of the owners. Having a partnership agreement offers the most flexibility in terms of how you can limit a spouse’s ability to stake an ownership claim in your business. For example, your partnership agreement can expressly state that no spouses have an entitlement to the business and require that spouses sign waivers to this effect, if you chose to do so.
Whether your business is a new one or well-established, and whether you are experiencing martial difficulties or not, it is sensible to take steps now to protect your key assets for the future.
If you have any questions regarding your business during a divorce, please contact one of the family law specialists at Grayfords.
by Pooja Sihra
Pooja is a guest blogger for Grayfords. Pooja is an international, post-graduate LLB candidate studying at City University London. She received her BA (Hon.) in Law and Society/Sociology in 2009 as well as a Master’s in Public Policy, Administration and Law in 2013 from York University in Toronto, Canada. Her interest in family law developed after navigating the challenges of acting as an estate trustee without a will in a family matter.