Business Ownership and Divorce
When a couple divorces, the process of separating their finances varies depending on the size and complexity of the asset pool. The process is a lot more complicated if one or both spouses own a business. It is not unusual for a husband and wife to own a company together or to be in partnership with each other and other people. Any business interest, be it a company, sole trading entity, trust, or partnership may be viewed by the court as ‘property’ in accordance with the Family Law Act. This article explores the complications that arise in a divorce where business ownership is involved in the property settlement.
Impact of Divorce on Business
The Australian Bureau of Statistics found that in 2019 there were almost 2.4 million businesses actively trading in Australia. Inevitably a number of the shareholders of these businesses are involved in divorce proceedings. Many business owners are surprised by the impact that divorce can have on their business, as the focus shifts away from the day-to-day running of the company. This can be particularly detrimental to a family-run business where the breakdown of the family can translate directly into a breakdown of communication and cooperation within the business. A separating couple who share business interests should take the time to plan how they are going to manage the business during the divorce process.
Divorcing spouses are obligated to make full and honest disclosure of their debts and assets during family law proceedings. This allows the court to gain an accurate idea of each party’s financial circumstances, including their resources, salary and liabilities. A business represents an asset, often with debt attached, and an ongoing potential source of income. Financial statements, BAS, business and bank records, and tax documentation relating to the business must be provided to both spouses. Compiling the documentation is a time-consuming procedure often completed by the accountant or bookkeeper of the business, but forensic accountants may be needed if there is disagreement over the finances of the company.
In determining the fair division of assets at the end of a marriage, the court will consider when the business was started, any marital assets invested in the business, and any work that either spouse invested in the business. If a business was started early in the marriage, the court will look on the distribution of assets differently than if the business was well-established at the time of the marriage, or was established towards the end of the marriage. The critical question for the court is to what extent each spouse contributed to the establishment of the business as an asset, either through direct contributions or by performing other duties that supported the spouse working in the business.
Business Income and divorce
There are complexities related to drawing income from a business during a divorce. In the normal course of events, it is straightforward for a partner in a business to draw a wage and pay tax as they go, and it is also not unusual for business owners to simply draw money out of their business as they need it. However, this can cause complications during property settlement negotiations, especially if one spouse is concerned that the other is stripping the business of assets.
Assessing the Financial Position of the Business
When the asset pool includes a business then it is important to ascertain the financial position of the business. This includes the debt held by the business, how this debt is being serviced, when the finance is scheduled to roll over, and the types of guarantees that are in place. The court will also consider how much income the business can be expected to generate in the future.
Businesses Owned With Third Parties
The situation is further complicated if the business is owned by one or more parties in addition to the married couple. In that instance, it becomes much harder to liquidate assets of the business without the agreement of the third party.
A common property settlement outcome in such circumstances is that one of the parties retains ownership of the company while the share of the other spouse is paid out. In other cases, the court will order that the shares of the business be sold if the parties cannot come to an agreement and there is a market for a sale.
Prenuptial and Postnuptial Agreements
Anyone with significant assets, including business owners, should have some form of financial agreement in place to forestall the sort of complications that are outlined above. Such an agreement is insurance in case of divorce and will often save a business from sale or bankruptcy in the event of a marital breakdown. A prenuptial agreement can be signed at any point before, during, or even at the end of a marriage. Talk to a family law expert to gain a better understanding of the options.
The family law experts at Armstrong Legal can advise you further on the implications of business ownership in a divorce settlement. If you have any questions on this topic or any other legal matter, please call us on 1300 038 223 or email to make an appointment.