Is a limited company protected from divorce?

Specialist family solicitor, Carol Toulson, discusses the complex issues around divorce and business ownership. In this case, is a limited company protected from divorce?

If you run a company and are considering divorce or separation, or one of your shareholders in your company is considering divorce or separation, you may be concerned as to how this will impact on the business.

The business or shares in the business and the income derived from the business will be a factor within divorce proceedings. 

For example, Andrew and Brenda are in business together.  Andrew is a builder and runs a successful development company.  He had just started the business when he met Brenda, and about two years into the marriage he transferred shares in the business to Brenda.  Andrew also pays Brenda a salary.  Brenda is not involved in the day to day running of the business but transferring shares to Brenda does mean that she can draw monies from the business which was tax efficient for their family. 

Is the company an asset to be considered within divorce proceedings

Within divorce proceedings each party can make a financial claim over the income and assets of the other party both now and in the future.  It is usually the case that where an asset has been acquired or accumulated during the marriage it is considered to be matrimonial property and therefore should be considered as part of a fair division of the matrimonial assets. 

In this case although Andrew had the business prior to marriage and he transferred shares to Brenda during the marriage and the business has moved from strength to strength, both Andrew’s and Brenda’s shares in the business are likely to be considered matrimonial property.

If Andrew had not transferred shares to Brenda and the company remained in his name it would still be an asset that he has grown during the marriage and will to be taken into account in a divorce settlement.

What is the value of the company

In each case you will need to consider whether the business has its own value or whether it just produces an income.  It would certainly be a good idea for Andrew to approach the Accountant that usually looks after the business and the accounts to get some idea of the value.  Sometimes it might be appropriate to instruct an independent accountant to value the business.  An independent or forensic accountant will look at the structure of the business, the assets available to the business, the balance sheet and of course the full accounts and consider a value taking into account a number of different approaches. 

Tax and company implications

Again, this can be a complex area.  It may be that Andrew and Brenda will both need independent advice with regard to tax consequences of transferring or disposing of shares. 

Is a limited company protected from divorce: how would a Family Court deal with the business assets

There are a number of options available to a Court.  It is generally the case that a Court will not order the sale of a business.  The Court can order the transfer of shares, order one party to pay a lump sum in return for their shares, order a deferred lump sum at the point of sale, order one party who is retaining an income from the business to pay periodical payments to the other.  It is also possible for Brenda to receive other assets for Andrew to then retain the business. 

There are many options. 

Divorce can have an impact on the success of a business and can be unsettling for employees and other shareholders. 

Are there any steps an owner can take to protect the business when deciding to divorce?

It is possible to enter into a Pre-Nuptial Agreement before marriage or a Post Nuptial Agreement after marriage clearly setting out what would happen to the business in the event of divorce or separation.  Such agreements do not formally bind a Court, however, case law has shown that the Court will take into account an agreement that has been properly drafted, there has been full disclosure of the assets, both parties have had independent legal advice and there are no signs of duress and the contents are not unfair. 

Pre-Nuptial Agreements can certainly provide some security for a business owner or people going into business with someone where divorce may be a future possibility.  Pre-Nuptial Agreements can also protect a family business where shares are being transferred to sons and daughters who then marry.  If the intention is that the family business should remain with the family, a shareholder should take advice with regard to a Pre-Nuptial Agreement prior to marriage.

Spouses employment law rights

Brenda will also have rights as an employee and any decisions Andrew will need to make need to be in accordance with employment law.

Holmes & Hills specialist solicitors can assist you not only in respect of the divorce and protecting assets, but also in respect of practical steps to transfer shares or remove employees.