When divorcing spouses are in business together – who keeps the business?
It is not uncommon for couples to be in business together. Sometimes they are equal partners in the business, both often bringing different skills, for example one an expert in sales and the other an expert in management. Sometimes one spouse is the main driving force behind the business, with the other taking a lesser role. Whatever the dynamic of the couple within the business, if they divorce, they are both usually worried about what will happen to the business and their role within it.
Fiona Wood, partner in the Group’s specialist family and children law practice McAlister Family Law, is one of the UK’s foremost experts at dealing with divorce cases where there are substantial and complex business assets. Here, she explains the options.
Under English divorce law a judge can order one spouse to transfer their shareholding in a company to the other spouse. A judge also has the power to order that a business is sold, as long as there are no third-party shareholders in the company, although this does not happen very often.
However, most divorces are not decided by a judge. Most divorcing couples reach a financial agreement, with the assistance of legal advice, and this includes those divorces where the couple are in business together.
Staying in business together
Some divorcing couples decide to stay in business together. This is often the case where the couple both have equally important roles in the business and taking either of them out of the business would damage it. It also happens when the couple already had a plan to build the business up with a view to selling it. This obviously works well where the couple are still on good terms.
A detailed Shareholders Agreement should be put in place by the couple when they divorce, if they did not already have one, to make sure that any disagreements that they have regarding the business going forward are dealt with fairly.
What if the couple both have important roles in the company, but one or both does not want to remain in business with the other? In this scenario one spouse often purchase’s the other spouse’s shares in the business. To do this the company and their shareholdings will have to be valued by an accountant within the divorce proceedings. The net value of the company, along with the non-business assets, will then need to be divided fairly between the couple.
The tax consequences of the share transfer will also need to be considered and factored into the divorce settlement, as CGT is usually payable by the spouse transferring their shares not long after they have been transferred.
If both spouses want to retain the business to the exclusion of the other, a judge will have to decide upon this. Alternatively, the judge could order that the business is sold, so that neither retain it. In my experience it is very unusual for both spouses to want to retain a business and even if they do, it is usually the case that the business is not viable without one spouse, but is without the other, which decides the issue.
In most businesses owned by divorcing couples, one of the spouses plays a far more important role in the company and often owns more shares in the company than their spouse. In this scenario, the spouse with the more important role will retain the company as part of their divorce settlement, with their spouse transferring their shares to them. Again, the company will have to be valued within the divorce process to ascertain its value, the net value of the shares being transferred and the tax consequences of the share transfer.
The income that the spouse retaining the company will receive from the company going forward, compared to the earning capacity of the spouse leaving the company, is also an issue that will need to be considered. Sometimes the earning capacity of the spouse leaving the company will be considerably less than the salary and dividends that they received from the company. Again, this will have to be factored into the divorce settlement.
If you are a business owner and are experiencing problems in your marriage, it is important that you take advice from a solicitor who is experienced in dealing with businesses within divorce. Please get in touch today. We are here to help.