Family law issues, such as divorce or separation, can be more than just personal battles; they can send shockwaves through a business, potentially impacting its operations, cash flow, and long-term viability. Disruption can stem from a relationship breakdown between business co-owners who are also domestic partners, or a third-party co-owner going through separation or divorce, leading to unforeseen claims on business assets.
This article outlines some considerations to help safeguard your business to ensure its continued success, even during family law challenges. The information is general only, and we strongly recommend seeking professional advice relevant to your circumstances.
Understanding Family Law and Business Assets
In family law proceedings, “property” encompasses a range of assets. Whether you own a business individually, jointly, or through a more complex structure like a partnership or company, those business interests are a consideration in the pool of assets subject to division in a family law property settlement.
When a couple separates, the Family Court aims to achieve a “just and equitable” division of property, taking into account various factors such as each party’s contributions (financial and non-financial) to the relationship and their future needs.
Protecting Your Business – Considerations
Various considerations are involved in managing risk and minimising the impact of a future family law issue on your business. These are best addressed in the planning phase of a business venture and with the guidance of a professional who can assist with ways to help minimise interruption and loss due to family law issues and other crises.
Business Structure
While factors like the nature and size of your business, growth projections, and personal financial goals influence the choice of legal structure for your business, considering potential family law implications is equally important. Talking to your lawyer and understanding the different types of business structures can help you choose the most appropriate one for your circumstances.
While the legal structure of a business can play a crucial role in its protection generally, the legal and ownership structure can also affect how a business is treated in a family law property settlement. For example, businesses wholly owned by one or both spouses/partners are usually treated similarly to other matrimonial assets, with consideration given to the parties’ respective contributions and involvement in the business when dividing property. Conversely, when business interests are held with other third parties (partners, shareholders, etc.), a court may be less likely to make orders that will upset the business interests of the other owners.
Trusts, when properly created and managed, have the potential to assist in safeguarding assets in certain circumstances, however, they do not guarantee immunity from claims in family law settlements.
Binding Financial Agreements
A financial agreement (or prenup) is a legal contract between spouses/domestic partners. Financial agreements made before or during a marriage or de facto relationship can determine the division of assets in the event of separation/divorce and deal with a range of financial matters, including how business interests are treated.
The agreement can help provide certainty and continuity surrounding the business operations after a relationship breaks down by determining, for example, who will continue running the business. The agreement may also contain provisions enabling one party to buy out the other at an agreed price or based on an agreed method of valuation.
Buy-Sell Agreements
Partnership agreements, shareholder agreements and buy-sell agreements deal with a range of matters governing the relationship between business owners. These agreements often include provisions setting out what will happen should a specified event occur.
For example, a buy-sell agreement can include rights and provisions for acquiring and disposing of interests in the business and specify certain events that will trigger the right to exercise such options. The triggering events may include the death, retirement, separation or divorce of a partner. Effectively, the agreement can restrict the ownership interests in the business to the existing parties, preventing an ex-spouse of an owner from acquiring an interest in the business through a property settlement.
Meticulous Record-Keeping
Maintaining comprehensive and accurate financial records is not just good business practice, but a critical step in helping protect your interests in family law matters. Recording financial and non-financial contributions to the business can help determine each party’s respective interests if negotiating a property settlement between domestic partners.
Accurate financial records are also helpful for determining the fair market value of a business, which is often a point of contention in property settlements.
Keeping business and personal accounts separate is also critical.
Conclusion
When starting a new venture, most business owners are not contemplating the potential separation from a current or future partner or spouse. However, a forward-thinking approach to business interests in the early phases can help safeguard against potential loss from subsequent family law issues. Understanding the implications of family law, implementing appropriate strategies, and seeking expert legal advice, can help reduce the risk to your business and ensure its continued success.
If you or someone you know wants more information or needs help or advice, please call 03 9670 7440 or email [email protected].