Family business and Divorce

WHAT HAPPENS TO A FAMILY BUSINESS WHEN THE OWNERS DIVORCE?

It is a common practice for the married couples or partners living together to establish a family business. The business can take the form of a partnership or could be run under a company. But what is the future of the business or the legal entity established to run such business when the relationship falls apart and the situation necessitates a divorce to take place? 

It is quite common for couples to start their business together. It is always recommended to know the legalities that surround the ownership and distribution of assets, should the circumstances take an adverse turn. In this guide, we will explain through the various practical aspects about a family business where the partners proceed for a divorce.

What Happens to the Business Assets in Case of Divorce?

Divorce between couples would require the need for decisions to be made with regards to the division of assets and provision of income support specifically considering the dependent members, particularly children. Since a company is considered to be a shared asset, it will be treated as any other financial asset. The business interests, for instance the shares in the company, are considered as part of the matrimonial assets and therefore are likely to be divided by the court, in case of a divorce or dissolution of a civil partnership.

Factors that Affect the Division of Company Assets Among Spouses

• When was the business established? 

It is important to know when the business was set up in relation to the relationship between the partners. Where the business is older than the relationship, it could give an edge to the partner who owned it. However, the court considers various factors like the family needs and the dependents when making a decision.

• Role and extent of involvement in running the business

As a common practice, many couples decide to assume the responsibilities of director and / or company secretary in the family business. It is important to determine if both parties were involved in running the company and what was the role in which they were handling the matters. Involvement could either be in the form of a financial investment or in running the day to day affairs of the business. 

• Are the profits from the family business the main source of income for the households?

Whether the profits from the business been used to support the shared lifestyle of the spouses, is one of the key factors. Since the division or disposal of financial assets would affect the maintenance and financial provision for the dependent spouse and children, this factor would affect the court’s decision. 

• How much is the business worth?

For sole traders, it is more difficult to mark a line between the business’s worth and goodwill from the owner. In case of the business being run as a limited company, it is easier to obtain formal valuation. The court considers the matrimonial assets and the financial resources of both the parties and looks to achieve a fair distribution.

How is the Distribution of Assets / Business Done for Divorce Cases?

In Ireland, the matters involving family and divorce are governed by the Judicial Separation and Family Law Reform Act 1989, The Family Law Act 1995, the Family Law (Divorce) Act 1996 and the Family Law Act 2019.

Under these laws, the court can exercise powers to dispose or transfer the assets in order to achieve proper provision for both the spouses and children. This can take several forms:

• Through a Property Adjustment Order – This could typically include the decision of transferring the family home to the spouse who is going to take the custody of the dependent children till they reach the age of 18 or 23 If pursuing a full-time education. 
• Spousal Maintenance – This is the option where one spouse provides the other with the maintenance for a fix term or indefinitely and the income from the shared business continues to support both the parties.
• A Lump Sum Payment – Where the court considers that it is not practically possible for the parties to continue to run the business together, it may order that the ownership of the business assets is transferred to one of them and that the other spouse is provided for adequately, which could take the form of a lump sum payment.

How Can I Avoid Complexities for My Business in Case of a Divorce?

While it can be beneficial to involve your partner in the running of the business and might result in some tax savings as well, it is best to keep the business and family matters separate. This can help to reduce the arguments / complexities in settling the matters of distribution and avoid unnecessary claims by the spouse should the relationship end. 

Marking a line of distinction between the business profits and salaries is important. It is advisable not to use the business profits as household finances, this will help to reinforce the validity of your claim as being the sole owner of the business.

Get Professional Help

Because of the potential complexity involved in the matters related to business and matrimonial relationships, it is always wise to seek advice from a solicitor. Also, the decisions reached by court can be blunt and inflexible, therefore it is recommended to decide the matters by negotiation between the two parties and reach agreement outside of the court.