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Couples in business

21st March 2014

What happens to the business if we separate or divorce?  How can I protect my business if I marry?  These are the sort of questions we are often asked by clients.  Whether you have a small family business, if you have built up a valuable business during the course of a long marriage, if you are thinking of marrying and have an established business or you are thinking of setting up a new business it is sensible to take some legal advice so that you know exactly where you stand.

You should consider carefully how a business should be set up in the first place; if you are married is it appropriate for a spouse to be a shareholder of the business?  If you are thinking of marrying and you have a valuable business, you may be able to protect that asset by having a “Pre-Nuptial” agreement.

If a married couple civil or cohabiting partners run a business together it can be a huge problem if they split up.  It makes sense to think about what would happen and have a written agreement at the outset– in the same way as business partners who are not involved in a personal relationship would usually do.

It is likely to be hugely damaging for a business if the owners are a couple at war with each other along with all of the emotional stress and trauma of their broken relationship.   Maintaining the business and the income stream is likely to be even more important if a couple are splitting up, particularly if there are children.  Every effort needs to be made to minimise disruption to trading and to keep the business on track.

One of the couple may need to bow out gracefully in order to achieve this or it may be possible to carry on working together.  If the business has been a successful one it is likely that they have an effective business partnership and it would be a shame to throw that away, particularly if the business has potential.  A family lawyer will be able to advise you about mediation, collaboration or arbitration.  These are highly effective alternatives to court for reaching agreements in family matters.

It is important to bear in mind that the family court does not have jurisdiction unless there is a marriage (or a civil partnership).  Former cohabitees who are in business together would need to fall back on basic Partnership law or company law and make an application to the civil or Companies Court to determine any issues between them.  They are in no different position just because they have had a personal relationship than anyone in business with other people.

The position is however different if there is a marriage.  The family court will have jurisdiction although it does not have exclusive jurisdiction.  The family court will generally take the view that it is the more appropriate forum for dealing with settlement of financial matters generally further to the divorce; a multiplicity of actions is to be discouraged.

If there is a business, whether it is owned by either the husband or the wife or both, it is taken into careful consideration on marriage breakdown by both parties’ solicitors and the court.  A business is a matrimonial asset albeit a different class of asset than say cash or a house.  It is usually an illiquid asset and the court generally will take the view that it should not be sold particularly if it is the source of a family’s income and will not want to “kill the goose that lays the golden egg”.  A business may need to be valued and a forensic accountant is sometimes instructed who will consider not only the value but also income potential and whether there is any liquidity in the business to enable cash to be drawn out to pay a settlement to the other spouse.

Therefore there are many issues to take into consideration where there is a business and a relationship.  At Mundays we are able to draw on the expertise in both our corporate and family departments and we work together to help our clients.

Sarah Duckworth is a Partner in our family department who advises on financial matters on divorce or separation.  For further information please contact Sarah on 01932 590 220 or email sarah.duckworth@muindays.co.uk or another member of the Family team.

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