Family Law

Effects of Divorce on Business

Family Law

Effects of Divorce on Business

Divorce can be complicated on its own when there is no agreement between the spouses regarding the division of assets, liabilities, and financial obligations. In the event of a separation or divorce, owning a business without a marriage contract or agreement can complicate matters. Under the family law, the businesses are treated as property, and they will be subject to the property division and equalization rules and guidelines mentioned in the Family Law Act. To minimize the financial impact of your divorce on your business, having a divorce lawyer by your side is crucial.

Our Family Law services

What are the legal implications of divorce in your business?

Since business is treated as property, its ownership and control may be contested by both parties if there is no agreement outlining the division of this property in case of a separation or divorce.

In a sole proprietorship: Here, one spouse is clearly the owner of the business. If the business was started before the marriage, it will be treated as a separate asset, and the spouse will be entitled to an equal share of the company’s growth after marriage. If it were started after the marriage, it would be treated as a marital asset, and the spouse would be entitled to a share of the ownership and profit-sharing.
Partnership with a third party: If the court were to divide the ownership interest between the two spouses, this might affect the partnership agreement. Modifying the partnership agreement beforehand is the best option to protect the business from such scenarios affecting the owners, such as disability, divorce, death, or retirement. For example, a buy-sell agreement can protect your business by requiring the spouse to relinquish their voting rights or to sell their interest back to the other partners in the event of a divorce.
Partnership of the spouses: If the business was started as a partnership between the spouses, this will continue until one of them accepts the buyout offer from the other or the business is liquidated.
Corporation: A corporation is a separate legal entity. This status will protect the business from divorce to a certain extent. However, if you have been using the funds from the family account for your business, your spouse can stake a claim.

How can a divorce lawyer help you?

Analyzing the spousal ownership of your business: Your lawyer will assess the spousal share of ownership based on factors like the business’s founding date and your spouse’s contributions. This will help you negotiate a reasonable and fair buyout or profit-sharing agreement.
Prenuptial or postnuptial agreements: It is highly advisable to enter into a prenuptial agreement to reduce the financial impact of a potential divorce on your business. Even after marriage, with the guidance of a family lawyer, you can sign a postnuptial agreement that will protect your assets, finances, and businesses.
Buyout agreement: You can offer to buy out your spouse’s share of the business. Your divorce lawyer will help you negotiate the buy-out agreement in the following manner:
- Transfer of ownership for a one-time lump sum payment.
- Transfer of ownership for multiple payments over a time period.
- Transfer of ownership in exchange for other assets, such as the family home.
Minimizing disruptions to business operations: Legal proceedings on the ownership of the business have the potential to disrupt the company’s operations. Your divorce lawyer will work on your behalf to negotiate and settle the matter out of court to avoid escalating the matter any further.

Frequently Asked Questions:

How can I legally protect my business from the effects of a possible divorce?

Prenuptial or postnuptial agreement: You need to enter into a marriage contract that clearly spells out the ownership of your businesses. A family lawyer can help you draft a prenuptial or postnuptial agreement that will protect your financial assets and minimize the impact on your business in the event of a divorce.
Setting up a corporation or trust: By converting your business into a corporation or trust, you are creating a separate legal entity that will protect it from changes in your personal life, such as separation or divorce.
Shareholder or Partnership Agreement: The business’s shareholder or partnership agreement may be modified to prevent the transfer of shares to the spouse in a divorce.
Keeping all business finances and transactions separate from your personal funds: This is also crucial. For example, even after you have incorporated your business as a separate legal entity if you continue to use the funds from your joint account with your spouse for your business operations, your spouse can stake a claim on the business in the event of a divorce.

Does my spouse have any ownership rights over my business?

If you started the business after marriage, it might be considered a shared asset. It will be subject to the property division order from the family court.
If you started the business before marriage, it might be considered a separate asset, with the spouse entitled to equal rights to any business growth after marriage.
If the business was the primary source of family income, then the spouse is entitled to financial compensation in the event of a divorce.
If the spouse played any role in the business operations, they will be eligible for a portion of its ownership or profits.

What happens to a co-owned business in a divorce?

Buyout: In the event of a divorce, one spouse may offer to buy out the other’s ownership of the property for a mutually agreeable sum.
Selling the business: Another option is to sell it altogether and then divide the proceeds between the spouses.
Couple continuing as partners: Even after the divorce, the former spouses can come to an understanding and remain as business partners. If so, they need to execute a strong legal agreement mentioning the division of ownership, roles and responsibilities in the operations, and profit-sharing.

We can Help

If you are worried about the effects of divorce on your business, contact our divorce lawyers today for a consultation. Our experienced family lawyers will help minimize the impact of the divorce on your business and negotiate a buyout of ownership to help you retain control of operations.