Divorce and dissolution are deeply stressful and upsetting for most separating couples. Added to the emotional upheaval, there is often lots to sort out, including making child, living, financial, and business arrangements. Contrary to what many believe, businesses are not, in fact, protected in the event of divorce or dissolution. If you are divorcing then it is important to understand the implications of limited company ownership on any financial arrangements. In this article we will take a closer look at what happens to a limited company following divorce or dissolution in England, Wales or Northern Ireland.
Is a limited company considered a matrimonial asset?
Although a limited company is, from a legal perspective, a completely separate entity from its owners (i.e. shareholders), any shares held are assets. The law states that any assets acquired during a marriage or civil partnership are considered to be marital (or matrimonial) assets. This may apply not only to any assets that have been acquired while married but also to those acquired while living together but before marriage.
The main principle is that both parties typically have a strong claim to an equal share in all matrimonial assets acquired during the marriage. This claim is significantly reduced for non-matrimonial property. This includes businesses that were established before the marriage, that have been inherited by one of the parties or that grow significantly after separation due to the efforts of one party.
What happens to a business following divorce or dissolution?
Even if a limited company is a marital asset, this does not necessarily mean that it must be split and divided between the separating couple. Such a decision will depend on a range of factors, such as:
- The value of the company
- Whether both individuals are actively involved in the running of the company
- Whether both parties wish to continue playing an active role in the running of the company
- The other marital assets, and
- Whether the proceeds of the company funded the couple’s lifestyle
Depending upon the circumstances of the case there are a number of potential outcomes, as follows:
- Buying-out your ex: If both parties have a share in the limited company then it may be decided that one person should buy out the shares of the other.
- Offsetting: Offsetting means that one party may decide to forfeit another matrimonial asset (e.g. property or savings) in return for keeping 100% of the company.
- Selling the company: In exceptional cases it may be simpler and fairer to sell the company and divide the assets between the parties. The courts normally prefer not to sell the company and, instead, transfer ownership to one party and compensate the other. The sale of a limited company may be necessary if neither party can reach an agreement on the transfer of shares.
- Pay spousal maintenance: If an agreement on the business cannot be reached then another approach is for one party to pay spousal maintenance to the other. This approach is often adopted where the business has been funding the lifestyle of both parties. By the paying of spousal maintenance, one party effectively receives a wage from the business.
Should my business be valued following divorce or dissolution?
In order to reach a decision on a financial remedy during divorce proceedings, it may be necessary to request a valuation of your limited company. This is not always required, however – e.g. if the business is extremely small. If the requirement for a valuation is not clear then a forensic accountant may be needed to review the company’s books and give an opinion. It is important, however, not to engage a forensic accountant who will then go on to carry out the valuation, since this may lead to a conflict of interest.
The need for a valuation will depend on whether:
- The parties own a substantial proportion of the business
- The business is likely to be sold within the foreseeable future
- The parties are approaching retirement age
- There are complicated structures involving trusts and holding companies
- The accounts show sizeable profits and turnover
- The accounts show significant capital assets
- There is a sizeable difference between the profits shown and the parties’ standard of living
- There is a suspicion that the capital of the business is undervalued
- There is a suspicion that the accounts do not show the full financial status of the company
- The partnership deeds and/or shareholders’ agreements stipulate that a valuation must be carried out.
A business valuation may not always be necessary, however – e.g. for:
- a sole trader
- a business that just provides an income stream for the family, and
- a small minority shareholding in a listed company.
If a decision has been made to value the company then one should engage a single joint expert (i.e. an independent business appraiser) who can work for parties. Arranging the services of separate appraisers for each party is a recipe for disagreement and hence delays in reaching a final and amicable outcome.
How will my business be valued?
Business valuation is a complicated specialist area. The aim of any business value appraiser is to replicate what would happen if there were a genuine buyer on the open market. They may use one of several methods to arrive at a fair valuation of a company, including an analysis of the business’s:
- Assets – this includes all of the assets held by the company, including freehold properties, stock, equipment, cash and intangible assets.
- Cash flow – the cashflow valuation method aims to forecast future revenues and costs to determine how profitable the business will be in the next few years.
- Comparison with similar businesses – a valuer may determine the value of a business simply by looking at the value of similar enterprises. This may be necessary if there is insufficient information on which to base the value of a company.
It is essential that the valuation of your company be carried out in a comprehensive, open and transparent manner. Disputes may arise if the business owner considerably undervalues the company or if they do not cooperate with the disclosure process. If there is any dispute regarding the valuation of a limited company then it is important to seek the advice of a specialist in this area of law.
How are limited companies treated by the courts in divorce proceedings?
There is no set formula for the treatment of businesses during divorce proceedings. Ultimately, the courts understand the wide range of factors at play and will make their decision based upon the information presented to them. They also understand that most divorcing parties do not want to continue working together: Rather, they want a clean break.
In the majority of divorce cases involving a limited company, one party will keep control of the business and the other will receive a payment. This may be in the form of a lump sum (either as one payment or in several instalments), regular periodic payments or a combination of both. For example, in the divorce case of SJ v RA (2014), the family business bought back the wife’s shares. In return, she received a lump sum of £12 million which equated to 35% of the value of her husband’s shares and 50% of the balance of the assets.
How can I protect a limited company in the event of divorce?
The best way to protect your limited company in the event of divorce is to enter into a pre- or post-nuptial agreement as early as you can. Nuptial agreements enable couples to agree upfront on how any non-matrimonial assets should be handled in the event of divorce or dissolution. While such agreements are not technically binding in law, the courts will consider them when making decisions on financial agreements.
Another way to protect your company is to ensure that your partner does not become actively involved in your business. It is commonplace for small business owners to add their partner to the “books”for tax reasons, either as a director, or as the company secretary or as a member of staff. The risk of taking this approach is that it may give your partner a greater claim on your business in the event of divorce or dissolution.
If your partner becomes a shareholder in your business then it is then important to ensure that your articles of association and shareholders’ agreement provide you with clarity and as much legal protection as possible.
Businesses can add to the complexity of divorce and dissolution proceedings even if the separating parties remain on amicable terms. Where possible, it makes good sense to do all that you can to protect your business in the first place. Doing so will ensure that you can retain ownership and control of your business if you decide to separate from your partner.
Uniwide Formations specialises in all aspects of UK limited company and LLP formation. In addition to handling the registration of your business with Companies House, we provide also a range of further business services to make your life easier while you are then running your company. In the event of divorce we can introduce you to one of our trusted accountants, deal with the issuing and transfer of shares, arrange the dissolution of your company, change your business address and much more.