Separation and Divorce – Protecting the family business

According to the Office for National Statistics, 41% of marriages will end in divorce.  Frequently, one or both partners will have an interest in a business.  Divorce or separation can prove challenging if so. With many business owners following the advice of their accountants to utilise their spouse’s unused tax allowances, it’s commonplace to find the spouse (or even an unmarried cohabiting partner) of an entrepreneur made a director and/or shareholder in a family company or made a partner in a partnership business.  But the implications of doing this, especially at a time of separation, can have time consuming and costly consequences.  It’s important that business owners take steps to fully protect their business and take early advice to consider how best to protect both their personal and business interests.

What is a ‘family business’?

A family business is usually one where the original founder remains in the business, or their family or children continue to run it.  It is usually a business in which one or more family members play an active role in managing it.  Where a divorcing spouse has a stake in the business, it will be considered as part of the division or marital assets.  If the family business is owned by other family members, parents or siblings for example, it won’t usually form part of the marital assets for division.

Mixing family and business – the implications

If the business owners are married the implications can be significant.  The family business can be considered a matrimonial asset, regardless of who owns it and regardless of who is running it.  This may mean your spouse is entitled to a share in the business on divorce.  On a divorce, any business in which a party has an interest in will therefore need to be valued, initially by the business accountant but potentially by an independent expert if there is a dispute over the valuation.   A spouse’s interest, such as holding shares, being a director or being a partner in a partnership can give them additional leverage in settlement negotiations, or lead to protracted discussions.     

The spouse’s ongoing position in the business can be a cause of dispute around the time of separation and in some cases, this can even lead to financial implication for the business.  There is a risk of the business being deadlocked and unable to properly trade if parties are unable to work together or agree business decisions.

The appointment of an unmarried cohabiting partner as a director and/or shareholder in a family company can also have unexpected consequences on a separation; especially if the intention was to do so for income tax purposes only.  It may be difficult to regain control of your business from your ex-partner if you have given them an interest and there may be tax consequences of them leaving.

Getting early advice – preventing an escalating dispute

Setting out clear intentions about the family business and what may happen to it in the event of a divorce or separation can be a good idea.  Our family experts can advise on:

• A pre-nuptial agreement if you are planning to get married.

• A post-nuptial agreement if you are already married but setting up a new business or thinking of bringing your spouse on board.  A post-nuptial agreement is similar to a pre-nuptial agreement but entered into post marriage. 

• A cohabitation agreement if you’re unmarried but living together.  This may be helpful to clearly define the parameters of your financial relationship, including the business. 

Our company and commercial team can also advise on Partnership Agreements and Shareholder Agreements which can include specific clauses in the event of a relationship breakdown, or Service Agreements to define employment duties if your spouse or partner becomes employed in the business.  Our employment law experts can advise on the complexities of a partner’s employment in the family business on separation.

Working together, our legal experts can collaborate on a bespoke solution to cover all eventualities. For further information contact:-

Sarah Liddiard, Associate, Company Commercial Law [email protected]

Laura Martin-Read, Senior Associate, Family Law [email protected]