Family law affects more than personal matters. A divorce or separation can pose a threat to business entitlements as well. How can you preserve your business income and assets during a property settlement? Let’s explore divorce with business involved and how to prepare for the future.
Business structure
Before making any decisions about how you will protect a business interest, consider your business’s structure. This can play an important part in how the Court chooses to divide business assets. If you are the sole owner, or have a family owned business with your ex-partner, the Court will typically treat it similarly to other marital assets.
If there are third party shareholders or partners involved, the Court may be less willing to grant orders to impact their interests.
Trusts
The degree of control the parties to the marriage have over the trust, and whether they’re beneficiaries.
Whether one or both spouses have contributed to the trust and enjoy the use of those assets.
If neither of these criteria are met, the trust will be excluded from a property order.
Being prepared from a divorce with business involved
There’s a lot of preparation necessary when protecting a business during a divorce.
Maintain records
Keep clear financial records regarding business income and expenses as well as documenting assets and liabilities. Regular valuations are important. It’s also worth keeping personal and business assets divided to avoid mixing your finances.
Document contributions
If both spouses are involved in the business, keep track of each party’s contributions such as their role and salary. Also, record any investments and financial contributions made by either party.
Consult experts
Speak with a financial adviser as well as a family law expert to ensure your financial strategy and proposed financial agreements offer adequate protection.
Prenuptial agreement
If you have business ownership interests, a prenuptial agreement can be very useful. Known as a binding financial agreement (BFA) in Australia, these agreements can help protect business assets. The major advantage of a BFA over consent orders or property orders is that you can create a financial agreement during or even before a marriage. If marital assets are divided by the Family Court after separation, family business assets can be vulnerable to a claim by your ex-spouse.
A BFA can help maintain continuity in business operations by stipulating who will continue to run the business after a divorce. You can also include a provision for one party to buy out the other at a pre-determined price or through an agreed-upon business valuation method.
Buy-sell agreement
If you’re in a business partnership, it’s important to have plans in place to protect your partners during a divorce or property settlement. A buy-sell agreement is a common way of providing this protection. This agreement provides that you will sell your interest in the business to the other partners once a trigger event occurs. In this case, the event would be a divorce or separation. This restricts ownership to the remaining partners and prevents an ex-spouse from gaining an interest.
It’s vital to get an accurate valuation of the interest. This can be done in two ways:
Obtain a market valuation from an independent valuer.
Set a pre-determined valuation agreed to by your partners and adjusted as necessary.
Conclusion
Business interests can make divorce settlements tricky to navigate. You need to consider the business’s ownership structure and the best way to protect your interest. Trusts may offer protection in limited circumstances. However, a BFA offer excellent flexibility and can be drafted at any time. Buy-sell agreements protect third party partners in the event of a divorce.
If you’d like to seek legal advice, contact our office for a free discovery call.
