The division of property in any divorce or separation can be a complex undertaking. The process can become especially tricky when there are business interests involved. Whether a couple co-owns a small family business or owns or shares a business with others, the task of evaluating and dividing the business can be difficult to navigate. Given that a business is often the main source of income for at least one spouse, it is vital to ensure the interest will be protected in the event of a relationship breakdown.
Rather than waiting until a relationship has broken down, it is in every entrepreneur’s best interests to set out post-separation expectations for the business well in advance. This will help to protect the business itself as well as significantly reduce conflict at the end of a relationship.
There are also factors to consider beyond dividing the value of the business during the property equalization process. The way a business is sold, or ownership is transferred, can have significant tax implications for each party and may impact the calculation of spousal or child support.
Prior to the enactment of the Family Property Act in 2020, family property division was governed by the Matrimonial Property Act, which only applied to married couples. Under the Family Property Act, the law regarding property division now applies to both married and common-law couples (also referred to as “adult interdependent partners”). For this reason, any person in a common-law relationship or marriage with interests in a business should take the time to consider how to protect this asset in the event of a future separation.
When one or both spouses start their own businesses during their marriage or partnership, or even before they begin the relationship, it is wise to plan for the possibility of a relationship breakdown as soon as possible. Business owners can opt to create these terms as part of a domestic agreement, a business contract, or both.
A domestic contract such as a marriage or a cohabitation agreement can be created at the start of, or during an existing relationship to set out both parties’ expectations and rights in the event of a future breakup. If one or both parties have interests in a business, a comprehensive agreement which addresses the division of the business, or its value, is strongly recommended. Even if only one spouse has interests in the business, the other spouse may be entitled to a portion of its worth if they contributed in some way to the success of the business. For example, one spouse may have taken a reduction in income or avoided working altogether to care for the couple’s children while the other spouse tended to the business.
No matter how a business is structured or the plan for dividing its value in the event of a relationship breakdown, a knowledgeable family lawyer can help design an agreement that will reflect each party’s wishes for the division of the asset and advise on how best to protect the business itself in the event of a separation.
It may also be advisable to set out the plan for dealing with the business post-separation in a partnership or shareholder agreement if both parties are involved in the business itself.
The way a business is dealt with upon separation will vary considerably depending on how the business ownership is structured. For example, the process will be different depending on whether one or both spouses is an owner, and whether the company is incorporated or not.
Each spouse may be entitled to a share of the value of the business as part of the property equalization process. If the business is owned by one spouse alone, the other may be entitled to a lump-sum payment, representing their entitlement due to their own indirect contributions, as mentioned above. In addition, the revenue and value of the business may have an impact on the amount of spousal support payable after a divorce.
If both parties share responsibilities for the business, then they will need to decide whether they will continue to run the business together post-separation. If not, one party may wish to buy out the other’s interest, or the business might need to be sold so the value can be shared equally.
The structure of the business can also have an impact on how the value is calculated, and how the assets are shared among the parties. If a company is not incorporated, such as a sole proprietorship or a partnership, the assets and debts of the business will generally be included in the calculation of family property. These items can include accounts payable and receivable, equipment owned by the company, and/or goodwill. For incorporated businesses, the shares in the company will have their own value that must be determined.
When dividing business assets in a separation or divorce, one of the most important steps will be to obtain an accurate valuation of the business as of the date of separation. Obtaining a precise and reliable valuation is key, as this figure will be used as the basis for determining the cost of a potential buyout, the amount required for equalization, and/or the calculation of child or spousal support, among other issues. In situations where the parties cannot agree on a valuation, or in situations where the assets are especially complex, it may be necessary to hire an external business valuator to ensure a fair and accurate assessment.
At Mincher Koeman, our family lawyers are dedicated to providing trustworthy and insightful guidance to their entrepreneurial clients in complex separation and divorce matters. Our experience in asset valuation and financial matters allows us to act as a guide through the complicated process of selling or dividing a business. Further, we can assist with preventative planning measures through the creation of detailed and well-planned domestic agreements. Please contact our office to make an appointment to discuss your matter with one of our lawyers today by calling us at 403-910-3000 or by contacting us online.
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