Who gets the business? A Guide to Divorce and Family Business
12th May, 2023
Divorce can be a complicated and emotional process. It is often challenging enough to get a fair financial settlement that both parties agree, but it can get considerably more complicated if there is a shared business to divide.
Divorce settlements can have an impact on a firm’s ownership and management, therefore it’s critical to understand what happens to a business during a divorce, what are the various outcomes, how is the business divided, and how to preserve the business.
Who gets to keep the business in a divorce?
Even if either of the spouses have not worked in or made any significant contributions to the business, or if each individual has their own firm – the business will often be considered a marital asset if either spouse owns a share in it.
However, it is extremely unlikely that the court would give a spouse who has never worked in the business a share in it.
The court would try to find another way to divide the marital assets so that both parties receive a fair portion, while ensuring a clean break from one another. Allowing the couple to separate peacefully as long as both are prepared to share the business.
How is the business divided?
After a divorce, the couple’s entire estate, including the family business, is divided. The company may be transferred, sold, or operated completely by one of the spouses. The value of the business and other assets will typically be taken into account by the court before deciding how to divide the assets.
- Selling the business: This option is often the last resort when the parties cannot agree on how to divide the assets. The sale proceeds are then split between the couple.
- One spouse buys out the other: This option is where one spouse takes full ownership of the business by buying out the other spouse’s share of the company.
- Continuing to co-own the business: In some cases, the couple can decide to continue co-owning the business after the divorce.
- Transferring ownership: The court can order the transfer of the business to one spouse or to a trust for the benefit of the children.
What are the relevant factors that a court considers?
When deciding how to distribute a family business, the court will consider various factors, including:
- The contributions made by each spouse to the business: The court will look at the contributions made by each spouse to the business, including the initial capital investment, the work done to build the business, and the risks taken to grow the company.
- The needs of the children: If the couple has children, the court will consider their welfare and may order that the business is transferred to a trust for the benefit of the children.
- The value of the business: The court will assess the value of the business, which may include hiring a professional valuer.
- The liquidity of the business: If the business is not liquid, it may be challenging to sell or transfer ownership, which can impact the distribution of assets.
- The spouse’s future earning potential: The court may also consider the spouse’s future earning potential and their ability to earn an income after the divorce.
Ultimately, the court will strive to achieve a fair division of assets between the spouses, taking into account all of the relevant factors. However, the exact outcome will depend on the specific circumstances of each case, and it is always recommended that individuals seek the advice of an experienced divorce solicitor to guide them through the process.
How can the family business be protected?
There are several ways to protect a family business in case of a divorce:
- Pre-nuptial or post-nuptial agreement: These agreements can be used to protect the family business by outlining how the assets will be distributed in case of a divorce.
- Trusts: Trusts can be set up to protect the family business, ensuring that it continues to be owned by the family even after a divorce.
- Shareholder agreements: Shareholder agreements can be used to protect the business from disputes between the owners, including in case of a divorce.
- Insurance: Insurance policies can be taken out to protect the business in case of the death or disability of one of the owners, which can impact the business’s value and ownership.
Divorce can be a challenging time, and when a family business is involved, it can become even more complicated. It is essential to understand what typically happens to a business during a divorce, the potential outcomes, the relevant factors that a court considers, and how to protect the family business. Seeking legal advice from an experienced family law solicitor can help ensure that the business’s interests are protected during the divorce process.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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