Splitting up from your spouse can not only have repercussions on your personal life, but if you own a business, there can be other implications too. It’s wise to take action at the right time and where you can. In this article, we’ve compiled the fundamental steps you can take to ensure you are divorce-proofing your business.
What are assets in a divorce settlement?
It’s important to know that when handling a financial settlement, all of your assets will be put inside the ‘marital pot’. This is a financial pool containing property, pensions and investments that both of you jointly own.
In England and Wales, these pertain to assets you acquired both before and during your marriage. In Scotland, only assets acquired during your marriage are taken into consideration. Even when your spouse has had no part of the business, it will still usually be considered a divisible asset in the eyes of the courts.
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Limit the involvement of your spouse
There can often be differences of opinion when it comes to the level of participation one spouse has had in the business. By limiting the involvement of your spouse, you are to some degree, safeguarding it in the event of divorce. If there has been any kind of demonstrable involvement from your spouse then this could result in a claim against it. Naming your spouse as a director is a common approach to tax-efficiency but it does demonstrate that they had a part in the business and therefore are entitled to a claim against it.
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Keep your personal finances separate from your business
In a similar vein to restricting the involvement of your spouse, you should also draw distinct lines between your personal and business finances early on. This means maintaining up-to-date records of all your personal transactions. When looking into your finances, the courts will need to determine what exactly the matrimonial assets are. Presenting your business as separate is a good grounding for when you begin proceedings.
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Agree on a post-nuptial or prenuptial agreement
If you have your own business and are not yet married, consider taking out a prenuptial agreement. This will go some way in protecting your business in the event of a separation. Although it is not a legally binding document, they are recognised. Stipulate within it that your business is separate from your personal finances and that if you divorce, you will remain the sole owner of it. If you are already married, then a postnuptial agreement is an option too. Be wary of drawing one up close to divorcing as this can be viewed as trying to prevent a claim from your spouse in the eyes of the court. They will look at whether prior to the agreement you both took legal advice and that you disclosed your full financial position when you agreed the terms.
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Pay yourself well and get your business valued
You may be tempted to pay yourself a low salary and leave as much capital in the business as possible to ensure it has a good future sale value. However, this could backfire as your company’s value will rise and your spouse may perceive that they are entitled to an increased share of its value. The value of your business is important, so it’s also worth contacting a respected valuer or broker to carry out an assessment on your business. They will evaluate your company by looking at all financial documentation, such as P&L reports, balance sheets, any assets the business owns. They will also use recent sales of similar business to reach a final business valuation.
Takeaway
The key takeaway for protecting your business is to make wise decisions as early as you can. Look into what might happen in the event of divorce and take steps to minimise the risks.
