ENTREPRENEURS: HOW TO PROTECT YOUR BUSINESS FROM DIVORCE
18 / 11 / 2020
This week is Global Entrepreneurship Week which is the world’s biggest celebration of entrepreneurship.
Richard Branson is famously quoted to have said “there is no greater thing you can do with your life and your work than follow your passions“. History teaches us that some incredibly successful businesses have been born out of recession and so the new world after the pandemic brings new opportunities.
Eyes wide open
Entrepreneurs routinely hire business lawyers for help and advice before, during and after setting up a company to protect their company. However, rarely does that advice involve a discussion of the risks to a business due to marriage or divorce, or what steps can be taken to eliminate or limit those risks. Marriage and divorce are both significant life events as well as business transactions. In modern society, where 42% of marriages end in divorce, these major life events should be part of any entrepreneur’s discussions about asset protection and risk analysis.
The start of a business, the end of a marriage
The pressures and demands of launching a new business on entrepreneurs and their families can often result in the breakdown of a marriage. A failed marriage can even destroy a thriving entrepreneurial business. Some of the most successful entrepreneurs have faced marital breakdown such as Elon Musk (Tesla), Jeff Bezos (Amazon) and Lori Greiner (Shark Tank).
There are many misconceptions surrounding business interests/companies in divorce settlements. The most frequent misconception is the idea that the family courts shall disregard the business when considering a financial settlement. Family courts generally do not interfere with the smooth running of a business or change its ownership however, in many cases the business will form a key focus of the proceedings both in terms of its value and the income that it produces.
The law will take a dim view of anyone seeking to squirrel away assets or make significant changes to their circumstances in view of an impending divorce.
How can you protect your business from divorce?
A pre or post-nuptial agreement
All entrepreneurs, including those whose businesses are still in development phase should consider a pre or post-nuptial agreement. Take the example of a successful tech billionaire who married decades ago without concluding a nuptial agreement – this was before his/her future company had even been founded. By the time their marriage broke, he/she had built up an enormous fortune. Our experience shows, that these cases can lead to full blown divorce battles that could have been prevented by a suitable pre or post-nuptial agreement.
The pre or post-nuptial agreement usually sets out how the couple wish their assets to be divided between them if they later separate or divorce. Some pre and post-nuptial agreements also detail how the couple currently arrange their finances and how this will continue or change during the marriage.
The English courts will try to uphold a pre or post-nuptial agreement so long as:
- the agreement is freely entered into by each party;
- both parties have both received independent legal advice on the agreement;
- financial disclosure was undertaken;
- it is fair.
Don’t involve your spouse in the business
Many business owners make their spouse a company Director or employee for tax purposes. The more prominent the spouse’s role and the longer he or she has worked in the business, the stronger the case a lawyer could make that this spouse helped build the business and should share the profit from its growth.
Don’t give your spouse shares or nominate them as a Director or make them company secretary.
Keep your household finances separate from the business
Maintain good records. Avoid running personal expenses through your company which makes it complicated to separate co-mingled funds which could be detrimental to your financial settlement.
Whether or not your business will be valued within the divorce depends on whether it would have a substantial value if sold. Different types of businesses will be subject to their own unique valuation process.
Where it is important for a business to be valued, an expert accountant will undertake a valuation on behalf of both parties.
Find a Family lawyer
Call on the services of a specialist family lawyer to understand your position. Find a family lawyer who is constructive and has a non-confrontational approach to divorce and family matters