What happens to a business in a divorce?
Any interest in a business or company can be considered property in a divorce or property settlement. It does not matter what business structure is used; it doesn’t matter whether the business is a partnership, sole trader or company. An asset is an asset, and as such, this interest must be valued to form part of the property pool. You should ensure you are aware of the business’s business structure and control, as it will dictate how the company will be dealt with in separation. For this reason, it is vital to keep up-to-date and accurate records.
Am I entitled to half my ex’s business?
No, divorce or separation does not automatically mean the other party is entitled to half of the business. Instead, the value of the business is included in the parties property pool. Each parties entitlement to the business is determined following family law principles after the business has been valued.
How is a business valued in a separation or divorce?
A business is valued in a divorce or separation; in the same way, it’s valued typically. However, when valuing a business in divorce or separation, family law is only concerned with the owner’s value of their share in the business, not its entire value. Additionally, the business’s future resources, for example, salaries and other benefits, shouldn’t be forgotten in the overall property settlement negotiations.
Each business is different, and many valuation methods are available to a valuer. Accordingly, a valuer will choose a method of valuing that is best for each business. The valuer will consider whether a business is ongoing or if it’s operating activities have stopped, whether the business’s earnings are stable or whether the business has any “goodwill”.
How are business assets divided once divorced or separated?
How a business asset is divided in a divorce or separation depends entirely on the business’s structure.
Dividing a sole trader business in a divorce or separation
In most cases, a sole trader like a tradesperson or professional consultant is a ‘personal exertion’ style of business, with very few employees other than themselves, if any at all. Despite this, a value still needs to be determined for the business. The majority of the time, the business is kept by the person who has the skill and training. Ordinarily, the valuation of a business relies heavily on the personal reputation of that individual. Usually, a reasonable value is applied to such a business interest as a ‘value to the owner.’
Dividing a spouse partnership business in a divorce or separation
If two partners are in business, they can choose to continue to operate the business. However, in most cases, one partner will buy out the other partner, or the partners will sell the business entirely. How much each partner gets of a business depends on its value and family law principles.
Dividing a company pty ltd business in a divorce or separation
If a business is structured as a company, what happens to it in a divorce depends on whether it’s a family company or has third party shareholders. If it’s a family business, it will be treated much like spouses in partnership. If it has third party shares, then the value of the company’s shares will need to be determined to be included as part of the property pool. What happens to those shares and the company as a whole depends on the company and its structure.
Takeaway
When a business is involved in a divorce or separation, it is essential to seek legal, financial and accounting advice. In most cases, the company or industry will need to be valued. Its current value and value as a future resource are all negotiable items in a divorce or property settlement.
