What Business Owners Need to Know About Divorce
The breakup of a marriage is never pretty. But it can be especially ugly when one of the divorcing spouses owns a business. Unfortunately, with approximately 40 percent of marriages in Canada ending in divorce, it’s wise to consider taking steps to protect the business and the family members involved.
While the specific rules governing division of assets vary from province to province, the general principle behind the Family Law Act is that each spouse receives whatever value he or she originally brought to the marriage, plus half of then increase in net family assets.
For example, if Spouse A brought $200,000 in assets into the marriage and the marital assets now total $1 million — a gain of $800,000 — Spouse A would get $200,000 plus $400,000, and Spouse B would get $400,000. Of course, most divisions of assets aren’t quite so simple, but there are a few steps you can take to smooth the way and save money in legal and valuation fees.
While every business needs a shareholder agreement in case of an owner’s death, disability or desire to leave the business, such an agreement can also be helpful in case of a divorce.
Shareholder agreements may require that the business’ value be assessed every year, so in case of divorce, it’s easier to find a baseline for current value and value during the marriage. This also saves the cost of a current business valuation.
In addition, shareholder agreements can (and should) address whether shares can be attached in any way relative to a matrimonial situation. For example, in case of the divorce of a shareholder, it’s likely that the other partners don’t want to end up with the shareholder’s ex-spouse as an active partner in the business. The agreement can also restrict the use of shares as payment for debts, which would prohibit the spouses from encumbering shares as part of a divorce settlement.
If you are already a business owner when you marry, a pre-nuptial agreement is useful in dividing assets. However, the Family Law Act looks for fairness and will likely support sharing any post-marriage increase in value with a spouse.
Pre-nuptial agreements may be more enforceable when shares were inherited or gifted. In this case, the pre-nuptial agreement simply codifies the couples’ agreement that the shares are excluded property under the Family Law Act and therefore are not to be divided.
It’s imperative that you and your spouse consult with independent attorneys about ways to structure both shareholder and pre-nuptial agreements. Your legal advisors can help you think through all of the “what if?” scenarios and ensure that your agreements will withstand the challenges that may come in case of divorce.
Finally, if you are considering divorce, it might be worthwhile for you and your spouse to consider hiring attorneys trained in “collaborative” divorce techniques. Collaborative divorce is an alternative method of dispute resolution that is often less expensive, quicker, and involves less conflict than traditional divorce litigation. At the very least, you could save money by jointly engaging one valuation analyst to determine the value of the business.
No one wants to go into a marriage assuming it won’t last. But a little planning can go a long way toward protecting a business and its owners from the impact of divorce.
Our firm can help you with shareholder and pre-nuptial agreements. Call us today for assistance.