Practice shows us that the value of a small business, aside from its founder, often approaches zero. Considering this, the very existence of a given business may hang in the balance due not just to a mistake in strategic planning, but to a mundane family quarrel as well. At best, this process raises the question of how to divide something that does not have a fixed price. At worst, it deprives the organization of one of its key employees. Do you think there are universal methods for dealing with this risk? Let’s ask MensDivorce.
Novice entrepreneurs put substantial money and effort into the development of their business. Naturally, investments are made with risks taken into account – risks that often include potential bad luck, miscalculations in the business plan or the machinations of competitors.
Few people at this initial stage think about how family problems – in particular, divorce and the subsequent redistribution of property – can torpedo the venture. This scenario, however, is rather likely. In consonance with OnlineDivorce.com, statistics show that in some countries, a married couple is more likely to split up than to preserve the relationship for a lifetime (i.e. there are more divorces than there are lifelong marriages). And over time, the number of divorces has been on the rise. It’s not just changing moral and ethical standards; economic problems at the state level also appear to be causing this statistical jump. Often, the reflection of the global economic downturn in the family business is a problem in itself.
Standard operating procedure in divorce courts is to divide jointly acquired property equally, regardless of who was the primary source of family income during the marriage. If the founder of a given business succeeds in proving the “materiality” of his/her contribution to a particular family business, he/she may get 60% (in extreme cases, 70%) of his/her assets, but not much more than half. It’s also worth considering that it is possible to sue for a large proportion of units.
The central question is as follows: How should these percentages be calculated in the small business sector? Which factors should be considered?
A crucial question is whether a legal entity was formed in order to conduct business (and whether this legal entity was created during the marriage period). Depending on this, we will see the division of a) the authorized capital or b) all the company’s property.
However, former spouses are not always satisfied with this state of affairs, which provides a fertile breeding ground for court cases. And in these situations, determining a fair separation of assets is quite tricky. Often, small companies have no assets besides, say, a pair of office phones.
An audit assessment, in turn, is unlikely to answer the following question: How much can this business be sold for to third parties (in any case, the sale price will depend on market demand)? The only real property for a small business is customers and prospects for the near future. But this is precisely what can be lost when you’re trying to divide the company in half or transfer it to a third party who is not familiar with the local peculiarities of doing business.
Here, we are talking about the simplest of situations, in which the business is concentrated in the hands of one person. In this case, the marriage contract, legalized by the Family Code, may well serve as a tool to protect your interests. This document may be concluded or terminated at any stage of the marriage, but at the same time, any actions with it must be certified by a notary.
Of course, even with a marriage contract, the divorce process will distract the business owner from the business process. It may also stall the company’s development or even alienate some customers. But the contract itself will provide a kind of “insurance” for the effort that was invested in the market. Thus, for small business owners, we can think of it as something analogous to CTP insurance for drivers. However, as is the case with an insurance company, it is better to set up an amicable agreement with your spouse – even before the family has problems.
The situation can be much worse if both spouses play a vital role in the shared business. Unfortunately, practice shows that a small company without one of its key specialists (or one of the founders) is often valued at practically nothing. Perhaps the only way forward, in this case, is to continue to work together until the business has gained sufficient momentum for sale to an outsider.
The value of a business, if one of the spouses engages in entrepreneurial activity as an individual entrepreneur.
One spouse can be registered as an individual entrepreneur. Property that he/she acquired during the period of marriage, and in the process of entrepreneurial activity, is considered universal joint property, even though it is registered only for the spouse-entrepreneur. It is divided between spouses in a general manner (Art. 34, 38; Art. 254 of the Civil Code).
When dividing the debt of a spouse-entrepreneur that has arisen over the course of entrepreneurial activity, it is necessary to establish for what purposes the business income was spent, and whether or not the joint property was acquired.
Business debt of one spouse can be recognized as his/her debt, which does not get divided, or as part of the spouses’ total liability, and must be shared in proportion to the value of their common property. Thus, if during the divorce and division of property one spouse claims wealth and income derived from the business of the other, debts incurred in the course of such activities may be recognized as general and subject to division.
At the same time, entrepreneurial activity is an independent activity, carried out at the risk of the registered person (unless otherwise provided by law) in the manner prescribed by law (Art. 2 of the Civil Code). Therefore, if the family budget did not receive business income, was not spent in the interests of the family – including on property – the debts of the spouse-entrepreneur should be attributed to his/her risk, and are not recognized as shared liabilities to be split between spouses.
The legislation does not explicitly regulate the division of property, including debts incurred from individual business activities. It is necessary to apply the general rules of family law on the division of jointly acquired property, but also to take the peculiarities of the given situation into account. What risks were taken, by whom, and to what extent were they independent?
The value of a business, if one of the spouses conducts business in the form of a commercial organization.
If the two spouses have shares in the authorized (pooled) capital of the economic partnership, society or production cooperative, then the property of the organization is divided – regardless of whose name is registered to participate in the commercial organization.
The following options for dividing a business are possible if participation in it is in the form of shares:
The division of shares between spouses as jointly acquired property, in which shares are assumed to be equal when divided. This option cannot be applied if the charter of the financial company, cooperative or constituent agreement of the partnership establishes a ban or restrictions on joining the number of participants of a new person without the consent of other participants and no permission has been obtained.
The alienation and division of one participant’s share are prohibited. Also, this option is not possible when dividing a share in an economic partnership if the spouse who claims to be a full partner does not have the status of an individual entrepreneur and does not want to acquire it. Only individuals who have the status of individual entrepreneurs can be full partners in economic partnerships.
A spouse can pay monetary compensation based on the market valuation of the business. Thus, one spouse will remain in the business, and the other will receive monetary compensation and lose the right to further participation in the company.
In accordance with Rosen, the business can be sold, and income from the sale will be divided between the spouses. Both spouses lose the right to participate in the company. This option can only be implemented with the agreement of both parties.
When choosing how to divide the shares, the court may also take the following circumstances into account:
The role of each spouse in the management of the commercial organization, as well as the presence of experience and professional knowledge (or lack thereof) in the field of business management;
The possible actions a commercial organization can take when changing the composition of its participants, and the likelihood of corporate conflict. For example, one spouse has a 100% share in the share capital. As a result of the division of property, each will receive a percentage equal to 50% of the share capital.
The probability of corporate conflict between the former spouses is very high since it will be impossible to make necessary decisions without each other’s consent. These decisions may pertain to the management of the company, distribution of profits, and the election of executive management bodies.
