How to protect your business from divorce

It is not uncommon for parties to enter into relationships already having a business interest or having an established business, and income stream.

In the event that the marriage breaks down, the interest in the business (and any corresponding assets, and value) may form part of the matrimonial pool available for distribution between the parties. This scenario can cause complicating factors for the party who holds the business interest, especially if there is also a partnership or directorship with one or more business partners who are independent of the relationship. If a business is considered matrimonial property, and there is no agreement for how the business interest should be dealt with, there might be no option but for the business to be sold. A party may also be in a position where they have to consider offering a portion of the business interest to existing partners or employees, which would in turn impact their position in the company, and future income. Third-party business partners and employees can also be impacted and affected by the end of a marriage.

So, how do parties in this position protect themselves from this situation, and how do you protect your business from divorce?

Pre and Post-nuptial Agreements

The most cost effective, and safest way is by entering into a pre-nuptial agreement. A pre-nuptial agreement is an agreement is entered into prior to a marriage and the aim is to set out how asset shall be divided upon a divorce. The benefit is that these agreements are generally entered into, and decisions made, when the relationship is happy and harmonious, rather than clouded by anger or bitterness. Parties can also enter into post-nuptial agreements after the wedding, which are sometimes utilised as a further tool to strengthen the terms of any previously entered into pre-nuptial agreement, or they can be considered as stand-alone documents if a pre-nuptial agreement was not entered into prior to the marriage.  

Non-matrimonial property and matrimonial property

It is important to consider the definitions of non-matrimonial property and matrimonial property, in the context of pre-nuptial agreements and post-nuptial agreements. Non-matrimonial property is property that is unlikely to be shared between the parties on the breakdown of a marriage, unless it is required to meet needs. Generally, non-matrimonial property is acquired by one party before the marriage, acquired by one party by gift, or inherited by one party. Conversely, matrimonial property (also known as marital property) is generally all property acquired by the parties after the marriage, unless it is non-matrimonial property.

However, and put simply, non-matrimonial property is not always excluded from a divorce settlement: the treatment of such assets will depend upon the circumstances of the case. It is also possible that non-matrimonial assets, including business interests, can become matrimonial assets.  

The court is able to take into account the value of any business interests held by either spouse – this can include sole traders, partnerships and shares in limited companies. In the absence of a pre-nuptial or post-nuptial agreement, a spouse may be entitled to not only half (or more) of the business interest, but also any appreciation and increase in overall value.

Benefits of entering into Pre and Post-nuptial Agreements

By entering into a pre-nuptial agreement or post-nuptial agreement, parties would be effectively seeking to classify the business, and any business interest as non-matrimonial property.  Similarly, parties may also want to enter into a post-nuptial agreement shortly after their marriage. Parties should also, at the end of a marriage, enter into a legally binding document such as a consent order, to protect their business from any future claim from the other party. This can apply in either scenario – when a party has come into the relationship with a business interest, or in circumstances where a business is created, established or acquired during the marriage. It is not unusual for one party, in the latter circumstance, to be more involved in the business than the other, and in a practical sense, it is not unusual for that same party to seek to retain the business interest and continue to run the business, especially if it is one that is viable and providing an income stream. Certainly, after the end of a marriage, it can be difficult for both parties to continue running a business together like they had done during the relationship. Failing to sever a business relationship could lead to future conflict and disagreement on how the business should run, and especially if the relationship breakdown is one that is acrimonious.

Finances and payroll

The involvement of both parties in a business during the marriage, can also lead to complications from a finances and payroll perspective, in the event of a marriage breakdown. A classic example is where one party is not an official employee of the business, but they may have been receiving a salary, or benefits from the business, for taxation purposes. Parties may employ spouses during the marriage, and they may have assisted with the running of the business during the marriage, however this also means that a party may be used to receiving an income for a period of time fry, the business. There are obligations as an employer, to your employees, and things to consider if you then want to remove them from the company payroll, and finances, even if they are the husband or wife. There may be risks, and legal implications if a party elects to do so. There may also be other ways to employ someone who is not the husband or the wife in a marriage. We would always recommend that all parties obtain advice from accountants, or otherwise on how to best structure a business, and the employment of their employees.

We regularly work with our employment law colleagues during a divorce to help advise our clients on such matters.

Stakeholders/company positions

Similarly, one or both parties also may hold various positions within the business and/or company. Parties will have to consider removing and extracting one or both of them from any stakeholder and company positions, and this may have a variety of taxation, and costs consequences. If a party is a shareholder, or director it may also be difficult to remove them from the business or remove them from the company, without destabilising the structure and ongoing revenue. It is important to seek advice from a corporate lawyer and seek structuring advice prior to involving a spouse in any business, and it is important to determine the best way for a husband and/or wife to hold shareholdings, to best help protect the business in the event of a divorce. It should be noted that the severance of any office holder positions, and how one party may be required to resign or relinquish their role in the business, is something that can be dealt with in pre-nuptial and post-nuptial agreements. The agreements can also note who will be liable and/or responsible for any costs associated with same.

At Brabners we also work with our corporate law colleagues during a divorce to help advise our clients on such matters.

When is it advisable to enter into Pre and Post-nuptial Agreements?

Although this article is focused on protecting business interests, the agreements referred to in this article can be entered into in many circumstances, including but not limited to when:

1. One party has more money, property or assets than the other at the beginning of the relationship;
2. One party may, at a later stage, be entitled to an inheritance or large gift;
3. One party operates a family business, or another  or investment that they need to preserve. The focus here is on preserving the parties’ pre-marital assets and business interests, together with income; and
4. The parties are entering into a new relationship, and there are children of previous relationships who need to be protected financially.

When should you think about entering into a Pre and Post-nuptial Agreement?

The general advice is to consider a pre-nuptial agreement as soon as a wedding is on the cards. Whilst a pre-nuptial agreement is not actually a legally enforceable document in England and Wales, it still acts as a strong protective measure for parties entering into it.  There are also requirements for pre-nuptial agreement to be in a prescribed form, and adhere to certain safeguards, so that it can be considered legally valid. Our family law team has experience in these matters and significant experience in ensuring that any pre-nuptial agreement drafted and entered into by parties, will have the best chance of being upheld in the Court, and be given significant weight, in the event of a marriage breakdown. It should be noted that provided the pre-nuptial agreements can be viewed as being ‘fundamentally fair’, they have a good chance of being upheld if ever challenged by a party in the event of divorce.

What are some practical tips for business owners upon divorce or dissolution of a civil partnership?

Some important things to consider for business owners, are as follows:

1. If there is agreement from both parties to enter into a pre-nuptial agreement, ensure that there are protective provisions and terms with regard to how the business interest will be dealt with, during the relationship, and following the end of a marriage.  
2. Use the pre-nuptial or post-nuptial agreements to classify whether the business is non-matrimonial or matrimonial property. Alternatively, you can quarantine the interest business altogether.
3. There is a risk of debt being appropriated to a party (even if is the intention of the parties for one party to retain the business following the end of a marriage). To limit debt liability, parties can include provisions which state that they will not assume each other’s debts accumulated by the business, during the marriage, or at the time of entering the marriage.
4. Keep accurate business records during the relationship. Have documentation as to the value, and state of the business at the time of entering into the pre-nuptial agreement, in case it is necessary to justify the value of the business in the future. 
5. Try to avoid intermingling matrimonial property with the business during the marriage, especially if it is classified as non-matrimonial property and ‘separate’ or quarantined in any pre-nuptial or post-nuptial agreement.
6. Consider whether it would be appropriate for any business partners to also other documents such as shareholder agreements or employment contracts that may assist regulate relationships. 

As noted above, our family law team have a vast amount in experience in preparing pre-nuptial and post-nuptial agreements, including the protection of any business interests. If you have any queries or need advice, then please contact a member of the family law team.