One of the major concerns of business owners who are going through a divorce is how to protect their business. In Australia, your business is considered an asset in family law property proceedings, just like your house or car. This means that if you're going through a divorce, your business could be impacted, especially if your ex-partner is a co-owner or has a significant interest in it.

Here’s what you need to know about the potential impacts to your business as a result of divorce.

How is a business treated in divorce proceedings?

The Family Law Act 1975 (Cth) guides how assets are divided during a divorce. The court aims for a just and equitable division of the "property pool", which includes all assets and liabilities of both parties. This means your business, regardless of its structure, is part of this pool and subject to potential division.

Several factors influence how a business is treated during divorce proceedings:

• Ownership structure: Sole ownership, joint ownership with your former spouse, company structure, or ownership through a trust all have different implications.
• Contributions: Both financial and non-financial contributions of each spouse are considered. This includes direct financial investment, unpaid work, and time dedicated to the business.
• Future of the business: In the event that the business was run jointly with a former spouse, a key consideration will be whether the business can continue to operate successfully without both spouses involved. Is it feasible for one party to buy out the other? Would selling the business be the best option?

Let's delve into some common scenarios:

Scenario 1: Sole ownership

Even if you solely own the business, your ex-spouse may still be entitled to a portion of its value. This is because the court considers their contributions to the relationship, which may include indirect contributions to the business such as supporting you while you built the business, or contributing their income to household expenses while you worked on the business without drawing a salary.

Scenario 2: Joint ownership or significant interest

When both parties have ownership or a significant interest in the business, things become more complex. Several options exist:

• Continue operating the business together: This is often challenging and can lead to further conflict, hindering negotiations and potentially harming the business.
• Sell the business and divide the proceeds: This offers a clean break, but it may prematurely end a successful business and impact both parties' income.
• One party buys out the other: This allows one spouse to retain the business, but it requires a fair valuation and the financial capacity for the buyout.

Scenario 3: The business is owned by a trust

If a trust owns the business, the court will scrutinise the trust's purpose and structure. They'll examine whether the trust is a legitimate business structure or an attempt to shield assets. The control each party has over the trust and its assets is also a key factor.

Challenges and considerations

Navigating a divorce involving a business comes with unique challenges:

• Valuation: Accurately valuing a business can be difficult and lead to disputes. Different valuation methods can produce varying results.
• Timing of sale: Selling during a divorce can be stressful and may not yield the best price. However, delaying the sale can also be risky due to market fluctuations.
• Tax implications: Selling a business can trigger capital gains tax and other tax liabilities. Consulting with a lawyer and accountant is crucial.

Protecting your business

Here are some proactive measures to consider:

• Seek legal advice early: A family lawyer with expertise in commercial matters can provide invaluable guidance.
• Obtain a professional valuation: This helps establish a fair market value for the business.
• Consider a prenuptial or postnuptial agreement: These agreements can clearly define how business assets will be handled in a divorce.
• Keep meticulous financial records: This helps demonstrate each party's contributions to the business.
• Communicate openly and honestly with your spouse: While difficult, open communication can facilitate a smoother process and potentially lead to a more amicable resolution.

Key takeaways

Divorce can certainly put your business at risk, especially if your ex-partner has ownership or a significant interest. However, understanding your rights, seeking expert advice, and taking proactive steps can help protect your business and ensure a fair outcome.