If you’re a business owner and you’re going through a relationship breakdown or divorce (or are considering going down this track), no doubt you’re wondering whether your ex-spouse has a legal right to part of your business.
The answer is not simple, as it depends on a number of factors, including the structure of your business, your financial situation, and the contributions that each spouse has made to the business.
To understand this fully, we need to first examine how the courts treat assets during Family Law matters.
Which assets may be divided?
In Australia, the Family Law Act 1975 (Cth) sets out the principles that the courts are to follow when dividing the assets of a couple who are separating or divorcing. The Act states that the court must first identify the parties' property pool. This is done by identifying all of the assets and liabilities that the parties have, both individually and jointly.
A business can become part of the asset pool divided in divorce in Australia. Any legal interest in a business or company, regardless of the business structure, is considered property under the Family Law Act.
Once the property pool has been identified, the court will then divide the pool between the parties in a just and equitable manner. The court will consider a number of factors when making this decision, including:
- The financial and non-financial contributions that each spouse has made to the relationship
- The needs of the parties, including any children of the relationship
- The future earning capacity of the parties
In most cases, a business will form part of the property pool. This means that the court may order that the business be sold or that one spouse transfer their interest in the business to the other spouse.
Does the ownership of the business by each party affect how a business may be divided?
While the ownership of the business will impact how it may be divided, that doesn’t mean that spouses without a legal ownership can’t claim a share. If the business is owned by one party only, the other party may still be entitled to a share of its value, depending on their contributions to the business and the other factors considered by the court.
If the business is owned by both parties, the court will consider their respective ownership interests when dividing the asset pool. For example, if one party owns a 75% share of the business and the other party owns a 25% share, the court is likely to divide the business in accordance with those ownership interests.
However, even in the case of equal ownership, the court is not bound to divide the business equally. The court may order a different division of the business if it is fair and equitable to do so. For example, the court may award a larger share of the business to the party who has made significant financial or non-financial contributions to the business.
It is important to note that the court will also consider the future needs of each party when dividing the asset pool. For example, the court may award a larger share of the business to the party who is primarily responsible for caring for young children.
How can you retain your business in the event of a relationship breakdown
There are a number of things that a business owner can do to protect their business in the event of a relationship breakdown or divorce:
- Enter into a prenuptial agreement or a binding financial agreement. A prenuptial agreement or a binding financial agreement is a contract that sets out how the parties' assets and liabilities will be divided in the event of a separation or divorce. These agreements can be very effective in protecting a business owner's business.
- Structure the business in a way that limits the spouse's exposure. For example, the business owner could structure the business as a trust or a family company. This can make it more difficult for the spouse to claim an interest in the business.
- Keep good financial records. This will help the business owner to prove the value of the business and the contributions that they have made to the business.
- Seek legal advice. A lawyer can advise the business owner on the best way to protect their business in the event of a relationship breakdown or divorce.
Additional tips for business owners
- Keep your business and personal finances separate. This will make it easier to divide your assets and liabilities in the event of a relationship breakdown or divorce.
- Don't transfer ownership of your business to your spouse unless you are sure that you want to do so. If you transfer ownership of your business to your spouse and you later divorce, you may have difficulty getting the business back.
- Be prepared to negotiate. In most cases, it is possible to reach a negotiated settlement with your spouse about the division of your assets and liabilities. This is usually the best way to avoid a costly and time-consuming court battle.
If you are considering divorce and you have a business, it is important to seek legal advice to understand your rights and options. A lawyer can help you to negotiate a property settlement agreement with your spouse or represent you in court if necessary.
Further reading: Why a single mum makes a brilliant business mum.