Separation, Divorce and Business Ownership

If you are a business owner in Australia and you are either thinking about separating from your partner or spouse, or you have already separated, this page explores the information specific to separation,?divorce and business ownership. We unpack common questions we are asked about this topic and detail what to be aware of as you go through the processes required when a de facto relationship or marriage comes to an end.

If you are in business with someone separating from their partner or spouse, this page will also be beneficial for you –?The impact of divorce on businesses and business partners.

As you may be aware, when a de facto or married couple separate, within a certain timeframe there must be a division of assets which is known as the property settlement process. Where there are business interests, trusts and inheritances, these must also be taken into account with property, cash, superannuation as well as anything else considered the property of one or both parties to the relationship. While we’ve explored what’s involved in the property settlement process elsewhere including?this page about how trusts are treated?and?this page about inheritances, here we share our family law insights that are specific to separation,?divorce and business ownership.

In Australia, the end of a de facto relationship is treated the same as the end of a marriage, in respect?the requirement of a property settlement. So, where you see the word divorce used throughout this page, consider the information provided to be applicable for de facto relationships as well.

How Are Business Assets Divided in Divorce?

One of the first steps in the property settlement process is the need for both people to provide what’s known as ‘financial disclosure’. This is where both parties to the relationship are required by law to disclose all of their financial information, including business interests.?

While the?financial disclosure process has been unpacked in detail here, in summary this process requires a full and frank disclosure of all assets owned before the commencement of the relationship, including what has been acquired during the relationship – either solely or jointly – and also takes into account the contributions, both financial and non-financial, made by each person during the relationship.

Specific to business owners, a valuation of any business interest is to be undertaken. This is regardless of whether one or both parties have business interests and regardless of whether one or both parties are involved in the same business. Where there are doubts as to the accuracy of the business’ valuation, a forensic accountant may be brought in to verify the original valuation.

Once we have the full picture, we can then provide our clients with an estimated range of what the property settlement outcome will be, which is expressed as a percentage. For example, between 45-55%. No family lawyer can ever provide an exact percentage, due to the discretionary nature of how a settlement is determined. For example, how a Judge may rule if your matter ever were to end up in Court, is never guaranteed. Similarly, if an agreement is reached without the involvement of the Court the people involved typically negotiate an outcome within that framework.??

Ultimately, and regardless of how the overall property pool is split between you, whether business assets need to be divided at all, will be dependent on whether the other person’s entitlement can be funded in another way.

Can You Lose Your Business in a Divorce?

The short answer is yes, it is possible. While there are asset protection mechanisms available to minimise risks like these, the reality is that your business forms part of the property pool and may need to be sold to pay the other person their entitlement.

If there are insufficient funds to fulfil the terms of the property settlement agreement (or Court decision), then selling the business or selling off its assets may be required. However there are many other options that can often be negotiated to reduce the risk of this.?

Can I Sell My Business Before Divorce?

You can sell your business at any time however that does not mean your former partner or spouse will not be entitled to any of the proceeds of the sale. It is always wise to consult with your accountant and your family lawyer if you are separating and considering selling prior to taking steps to do so.?

Are You the Advantaged Party, Disadvantaged Party or Neither?

From our years of experience in assisting people through their separation and divorce with businesses, we often, but not always, see one party who could be considered ‘the advantaged party’ and the other ‘the disadvantaged party’. Even in circumstances where both parties to the relationship have been directors in a business, often one person has more insight and clarity about the finances of the business and how it is run day to day.?

The disadvantaged party is so because, in addition to the significant emotional load that comes with separation, they find themselves having to get up to speed about the operations and profitability of the business (or businesses), which can take considerable time. And, if there is reluctance on the advantaged party’s side to be forthcoming with information, this adds additional time and stress. This is especially common where one party to the relationship has had the more significant relationship with the couples &/or business’ accountant.??

In Australia, because the property settlement process can begin any time from the date of separation, the pressure to pull all of the financial information together and get your head around it all quickly, is real. Additional issues can arise later down the track, if early legal advice is not sought.

Information To Gather Early

For both parties – advantaged, disadvantaged or neither – who have business interests between them, the most pressing pieces of information to have access to are:

1. The financial position of each business; and
2. How funds are being taken out of each business.?

Where this information is not provided quickly and easily, legal advice about how this can be approached will be helpful to expedite access.

Business Financial Position?

When we work with clients to determine a business’ financial position we are looking for more information than just the balance sheet and profit and loss statements. That being said, it is not the role of any family lawyer to review the finances. This information must be provided by you and your accountant.

To calculate the property settlement range with as much accuracy as possible and structure a settlement, we need additional information including:

• What debts exist in the business/es;
• How those debts are being managed; and
• If there are loans, how they are serviced, if there are any bank guarantees in place and if there is a rollover period looming.?

How Money Is Taken Out of the Business

Depending on the structure of your business interests, there are different ways that funds are taken out of businesses. For example, in a company structure where both parties to the relationship are directors, you may be paid through one of three methods:

1. By wage (income taxable);?
2. By director’s loans (which also has tax consequences); and
3. By dividends (which can have tax consequences if franked shares).?

Commonly, steps have historically been taken to minimise overall tax for a business and its Directors which may no longer benefit one party to the relationship. So, along with the support of your?accountant, we are looking to ensure we have all of the information required to preempt any potential risks and help the property settlement process progress.

Separation, Divorce and Business Ownership. Be Informed.

Given the complexity that exists with business interests, seeking specialist family law, accounting and often financial planning advice considerably minimises your risk and the risk to your business interests. For too many business owners, the consequences so often become apparent only later on when there is nothing that can be done to reverse it.?

Regardless of whether you consider yourself to be an advantaged or disadvantaged party, where businesses are involved, separation and divorce can easily derail so many well laid plans and effectively place your business and your life on pause.?

Early decision making without legal advice can negatively impact you and your business. Good family lawyers will be able to spot potential issues for you and arm you with insights to make better decisions.?

Careful selection of who you take advice from and getting it early, is the first step in making the process of separation,?divorce and business ownership?considerably easier, faster and more cost effective. It is when lawyers are brought in later to try to fix decisions and actions made, that so often leads to escalated and drawn out disputes.

Related Articles:?Why can’t you give me a precise answer about my property entitlement?

Divorce and Business Partnerships – Minimising Risk for your Clients?

How do you work out what the family business is worth?

The impact of divorce on businesses and business partners??

Gifts and Inheritances – How are they treated in a Property Settlement?

Phillips Family Law is an award-winning Family Law practice serving clients across Australia and abroad. Regardless of where you are in your decision-making process, we can make you aware of your options. To discuss your situation confidentially, phone?(07) 3007 9898?or secure a time by filling in our confidential form?here.

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Disclaimer: The content in this article provides general information however it does not substitute legal advice or opinion. Information is best used in conjunction with legal advice from an experienced member of our team.