Divorcing Your Business Partner – Key Considerations
Setting up a business with a spouse/civil partner can be a great move, as can bringing a partner into the business as an employee or fellow director.
But what happens if the relationship turns sour? Whether the stress of both working and living together causes fractures in the relationship, or whether other reasons entirely are behind the break down, having work and home life so closely intertwined can have wide-reaching repercussions when things go wrong.
So what are the options and what is the best advice for married couples and civil partners that operate a business together?
Upon formalising a business relationship, it is advisable that a partnership or a shareholder’s agreement be put in place. Such agreements protect the interests of both parties (and other parties that may have an interest in the business) because they help define the roles of the couple as business partners and dictate an outcome in the business world. In reality, as business relationships are usually formalised when a personal relationship is going well, it is uncommon for a couple to have commercial agreements in place.
From a family law perspective, where there is no legal documentation, joint assets acquired during the marriage are combined and split between the parties upon divorce as they form part of the “matrimonial pot”. For couples that have taken an equal role in a business’ operations, this may be fair. But for others, where one person has contributed more than the other, this can be a bitter pill to swallow.
It is important to point out that for completeness, a pre-nuptial agreement that reflects the partnership or shareholders’ agreement is also advisable. In the absence of a pre-nup, or where a pre-nup lays out an alternative set of plans, any business contracts might be overridden by the family courts.
Keep on top of the paperwork
Keeping your paperwork up to date and your accounts in order are advisable in any event. But in the case of business owning spouses/civil partners separating, paperwork can provide vital evidence that can be used to support your case. For example, one partner may have supplied the majority of the initial capital to set up the business, or perhaps injected cash at various stages. But without documentation to show this, it can be hard to prove and therefore the chance of recovering your investment is low.
The future of the business
Every business is different and factors including the presence of other Directors or staff, and how involved the married couple/civil partners are in the day to day running of the business, will likely determine the long-term future of the company. In general, there are three potential outcomes:
- one spouse will buy the other out
- the couple will continue to work together
- the business will be forced to shut down.
Where a couple own a business on a 50/50 basis, a joint decision will have to be made. Unfortunately, where a decision cannot be reached, a business will usually be forced to close, resulting in the potential loss of livelihood for both parties.
Day to day practicalities
When a couple decide to divorce or separate, it can be emotionally stressful at the best of times. On top of the strains at home, if you still have to work together, even if only for a short period, it can be easy for your emotions to get the better of you.
From a practical perspective, it’s important to try to keep things ‘business as usual’ – particularly in front of colleagues, clients or other stakeholders. Discussions about the business’ future will need to take place, but be sure that these occur behind closed doors, at least until the point where some decisions about the future have been made.
Regarding such discussions, using a mediator can be helpful for both sides. Mediated discussion can aid amicability, thereby increasing the likelihood that a way forward that suits both parties, as well as the business, can be reached.
Aiming to keep things outside of the courts is likely to be in your best interests. Divorce cases involving a business can be very complex, and where so many factors are involved, leaving it the courts can result in an outcome that benefits no-one. Where both parties have a good team of lawyers and accountants, it can be possible to resolve any issues and reach an agreement.
O’Donnell Solicitors have advised many business owners throughout divorce proceedings. Our family team work closely alongside our commercial law team in such cases, helping to navigate the various possible outcomes to reach an agreeable arrangement for all parties. Similarly, we can help those setting up a business or who are planning on marriage/civil ceremony to ensure their interests are protected.
Anthony Jones is Director and Head of Family at O’Donnell Solicitors and is a Resolution Accredited Specialist. For more information, please contact him on 0161 641 4555 or email [email protected]