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8 Tips Business Owners Must Know About Divorce Property Settlement

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8 Tips Business Owners Must Know About Divorce Property Settlement

Are you a currently going through a divorce? As a business owner, it can be extra mtressful. You may be wondering, is my business classed as an asset when dividing up our property? Can my Ex claim a share of the business? Will I have to sell the business? Not only do you have to deal with the personal impact of divorce, you are also left wondering how it will affect your business.

In this article, we will outline what is classed as property in a divorce settlement, and how you can protect your business from going belly up in a divorce.

What Happens To Business After A Divorce?

When dividing property in family law, all assets and liabilities of each partner are combined to form the “matrimonial asset pool”. This pool is then divided between the two parties. If you own a business or have an interest in a business, it is important to understand that any financial interest you have in the business will be given a dollar value and form part of the matrimonial asset pool.

Measurements of a businesses value can vary, however in a Small Business, it is the assets of that business that will largely determine its value. If you want to keep your interest in the business, you should be aware that its value would be attributed to your portion of the overall split.

As a result, it is a good idea to protect your business from being subjected to family law property proceedings. If you do nothing to protect your business it may end up destroying your financial future, and impact co-owners and employees of the company.

Protecting Your Business From Divorce

Legal planning is key in any business. Proper legal planning can save you and your business a lot of potential headaches.

Whether you are on the verge of a divorce or are happily married, it is a good idea to shield your business ventures from your personal life. If you have a business partner, it is a good idea to ask them to do the same. Here are some key legal avenues to protect your business in a divorce.

Enter A Binding Financial Agreement With Your Spouse

A binding financial agreement can be entered into before (prenuptial agreement), during or after the end of your marriage. The purpose of a binding financial agreement is to come to a fair understanding about how to divide assets in the event of a divorce.

Have A Buy-Sell Agreement With Any Business Partners

If you are the primary shareholder of a family business or you have other business partners, think about entering into a shareholders agreement. This is similar to having a binding financial agreement with your business partners. This states that a family member or spouse is held back from taking ownership of any shares in the business.

This agreement should specify what will happen if the owner’s status changes, including a partner’s right to buy further into that business at a pre-set price. This applies to more than just divorce. If a shareholder dies or becomes incapacitated then their shares are offered for sale to other shareholders before being offered to a spouse or other family members.

Separate Family From Business

Firstly, do not involve your spouse in the running of the business. This is to make sure there is a clear division between your married and business life.

Keep business and family finances, assets, and banking arrangements separate. Without a clear financial division between business and personal finances and assets, it can be difficult to protect business assets in a divorce. Also, pay yourself a market salary. This can help counter any argument that you have mixed business and family assets by diverting family resources to support the business.

To take it a step further, put your business and it’s assets into a trust. This must be done long in advance without a hint of divorce. It’s structure will allow you, in theory, to argue that the trust is the owner of those assets and that they should not be considered part of the matrimonial pool. However, its effectiveness can vary and is dependent on a number of other factors. It is always good to consult a lawyer to find out what is best for your situation.

Be Transparent With Financial Information

Currently going through divorce? Australian Family Law Courts can be very strict towards people who may look like they are trying to hide assets. Whilst it may seem counter-intuitive, by keeping your business financial information available to your spouse, it will help you with a smooth property settlement.

Trading Your Share Of Other Marital Assets

If you are already involved in a separation, consider trading in your share of other marital assets, such as your house, for your spouse’s equity interest in your business. Another option is to pay the buyout price from company profits over time. This isn’t for everyone. It requires the company to be profitable, and the spouse to have trust that the other will run the business effectively.

Alternatively, you could borrow money so you can buy out your spouse’s share of the business. This is made possible if the company’s assets are sufficient enough that they will be accepted as security for a loan.

Share The Business With Your Ex

Wait, what? This may not be the most attractive option, but it is one to consider, especially if you don’t want to sell the business outright or liquidate assets. In this case, bother people continue to operate the business.

This can often happen if it is in the best interest of both people or if the business is the only asset and cannot be easily divided. To make the operation of the business smoother, a consent order by the Family Court can set out how tasks will be delegated and the management of affairs in the future.

Finally, Be Prepared…

Property settlement can often be time-consuming and stressful. Preparation is key to make the process as smooth as possible.

Prepare to invest a lot of time and effort meeting with family law experts, gathering documentation about business finances and structures, which will lead to more questions, resulting in more documentation needed.

Be sure to maintain up to date and accurate financial records at all times. Often, both you and former spouse will consult with independent financial experts and seek independent valuations. Maintaining up to date information can make this quicker, however, expect this process to also be time-consuming and expensive.

Does your business employ staff? Expect staff moral to take a hit, especially if there is uncertainty about the future of the business. Productivity can drop and customer relations can be impacted. Expect this, and plan for it.

By taking these steps to protect your business during a divorce, you can expect a smoother property settlement and have confidence that, in the end, the business will pull through.

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