A divorce shouldn’t mean the end of your small business, but if divorce is imminent, then your business is at risk.
Aside from the anxiety, you may also be facing financial turmoil. Whilst you’d prefer to be focusing on growing your business, it’s more likely that your business will be impacted by the divorce and the financial implications might be very serious.
You will need to invest time and effort meeting with lawyers, gathering documentation about the business structure and finances, which is likely to lead to further questions about the businesses practices and P&L. Often both parties will seek to engage their own independent financial experts and seek separate valuations, which can be a time consuming and ultimately expensive process.
Staff moral may also be impacted with uncertainty that divorce can bring. The future of the business is often a water-cooler discussion and the level of conflict between spouses can be so high it impacts staff, loyalties are questioned, productivity undermined and even customer relations can be damaged.
Once valuations have been completed and both parties have a clearer view of the financial position, decisions will need to be made about the business and its ownership structure. If the business is wholly owned by a family trust, it is likely this will cause more complications. Therefore, it’s important that you and your spouse understand the tax implications both now and in the future so that you can plan for the future of the business should a divorce-driven settlement be the final result.
If you are a small business owner, what are some practical steps you can take to prepare your business in the event that you ever need to separate or divorce?
LawPath specialist Damin Murdock of MurdockCheng Legal Practice says “there are ways to prepare and minimize the impact on your business, ahead of any unfortunate divorce or sale of your business”.
If you have established a family business where both husband and wife are directors and shareholders of the business, then here are 6 ways to prepare and minimize the impact of possible divorce and property settlement:
- Maintain accurate and up to date financial records at all times.
- Make sure your business never accepts cash in hand payments as these kinds of business practices can be used against you in family court proceedings which will ultimately result in a clear divide between business valuations;
- Consider entering into a Shareholders Agreement with your spouse. This will result in the husband and wife having to comply with the terms and conditions of the Shareholders Agreement with respect to valuing the business; transferring shares between shareholders; and forcing dispute resolution procedures to take place, prior to any court proceedings being initiated;
- If you are the sole shareholder/director of a family business and you have other business partners, consider entering into a Shareholders Agreement which explicitly states a spouse or other family member is refrained from taking ownership of the shares in the business. This is generally obtained by way of having a default provision in the Shareholders Agreement. For example, if a shareholder/director dies, becomes incapacitated or divorces, then prior to the shares being offered for sale to a spouse or other family member, the shares must first be offered for sale to the other shareholders at a reasonable market value, based on the valuation procedures specified in the Shareholders Agreement;
- Consider entering into a pre-nuptial/post-nuptial agreement with your spouse (notwithstanding these kinds of agreements are not always enforced by the Family Law Courts); and
- Consider establishing a family trust without your spouse being a beneficiary of the trust and then establish a corporate trustee to hold the shares of the family business for the benefit of the family trust.
If you have a question about the impact of divorce on your business ask Damin or a LawPath Lawyer a question now.
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