Top 5 ways to divorce proof a business

When it comes to divorce and business ownership, there are ways that you can protect your business from property settlement during a divorce.

Divorce Proof Business

For business men and women, their hard-earned assets are worth more than just a dollar value. Most entrepreneurs invest significant hours in starting up a business and poor their heart and soul into making their business successful. Aside from the heartache, blood, sweat and tears that goes into starting up a business, keeping that business running is also a labor of love. Whether it’s big business or sole traders the level of dedication and expertise that it takes to start and run a business should be admired.

As a family lawyer, I am often confronted with situations where business owners wish to fiercely protect their business in the context of separation, and rightfully so.  Too often do I see the scenario where companies, family owned business and sole business ventures are demolished by a separation and subsequent property settlement. This is unsettling for me as a lawyer but this pales in comparison to the lifelong consequences for my clients.

So how do we “divorce proof” a business? Better yet, can we actually “divorce proof” as business? Simply put, yes, there are ways that you can protect your business from falling victim to a property settlement. While there is no full-proof way of doing so, there are some simple measures a business owner can implement to protect their most precious asset.

Do not include your spouse in your business

For most people this is easier said than done however, there is beauty in separating business and pleasure. A person’s entitlement pursuant to a property settlement is largely based on contributions (among other factors). If a person has not made financial contributions to a particular asset of the relationship it is more difficult for that person to seek a portion of that asset.

As a disclaimer, this is one of those measures that isn’t exactly full proof. The Family Law Act 1975, recognises non-financial contributions, so for example if the wife stayed home and looked after the kids and the household while the husband built the family business, then it is likely that she will have an entitlement. So, in short whilst not full proof it certainly helps to keep your spouse out of the business where possible.

Separate your business and personal finances

Your personal finances are your household bills, mortgage repayments and your personal or family accounts. Making a distinction between your business accounts and finances and personal accounts and finances may make it easier to identify the value of your business and your contributions towards that business.

This is something that you want to establish from the outset of your business and/or relationship to ensure there is no blurring of the lines when it comes to business finances and personal finances.

Pay yourself an appropriate salary at market rate

This is a bit of on overlap of business and personal finances which is inevitable. The key is to make sure that you are paying yourself a market-rate salary, so do you research and make sure you are not overpaying or underpaying yourself. A comparative analysis of similar roles in your area of expertise is ideal.

Ensuring that you are paying yourself the right salary undermines any assertion that you may have redirected family resources to your business and vice versa.

Keep detailed financial records

Aside from your obligations under the Corporations Act 2001 to maintain accurate and transparent financial records, keeping detailed financial records can also assist in the context of a property settlement.

Financial disclosure is paramount in a property settlement. Both parties must have an informed understanding of the financial position of the other and the value of all assets, liabilities and financial resources including businesses. Accurate records ensure an accurate valuation of your business to guarantee you are not over-estimating the value of your business to your detriment.

You also want to avoid a situation where directors loans are creating substantial accounts which may be vulnerable in a property settlement. All directors’ loans should have an adequate paper trail to be exchanged through the disclosure process.

The good ol’ pre-nup.

Formally known as a Pre-nuptial Agreement, these days we call it a Binding Financial Agreement which can be entered into prior to entering into a relationship, during the relationship or post separation/divorce.  There is a stigma associated with a Binding Financial Agreement where there is an inherent assumption of lack of trust in a relationship or assuming your relationship is doomed for failure. If we look at this in a different context, we don’t prepare a Will waiting for death or tempting fate when it comes to your inevitable demise. We prepare a Will to ensure that when we do pass away our family and loved ones are provided for. A Binding Financial Agreement is hardly different. This agreement is only implemented in the event of a breakdown, as a protective measure for yourself and your spouse. If you are fortunate enough to celebrate your 100th wedding anniversary with many years more than it is unlikely that you will have to implement this agreement.

The best time to consider entering into a Binding Financial Agreement with your spouse with a view to protecting your business is prior to marriage or at the outset of your relationship. Where you are considering amalgamating your finances and jointly purchasing or maintaining assets a Binding Financial Agreement can protect both parties’ individual wealth.

A Binding Financial Agreement should detail how property and financial resources should be dealt with upon the breakdown of a relationship.  An agreement entered into prior to the breakdown of a relationship will avoid the messy negotiation process and set out detailed instructions for the division of assets. Bear in mind that both parties’ must have independent legal advice prior to signing a Binding Financial Agreement. This is a non-negotiable.

Again, a disclaimer that Binding Financial Agreements, whilst a useful tool and at times an incredibly powerful document are not always a certainty when it comes to protecting your business. A Binding Financial Agreement can be challenged on numerous grounds which would take me days to summarise, so for now keep this in mind and make sure you seek legal advice around the technicalities with these agreements

Blatantly put, don’t rely on your rose-colored glasses when it comes to your relationship and protecting your business. The wise-man said that one must always be prepared for anything. There are practical ways to ensure that your business and hard-earned wealth is preserved upon separation. For those who have invested their lives into their business and sacrificed a myriad of life’s pleasures to keep that business running, be pragmatic, make sure you get legal advice and consider your options for safeguarding your business in the event of separation. There is peace of mind in knowing that you have taken all the necessary steps to ensure that your business and for some people your life’s work is protected in the event of a separation

At Forge Legal we have expertise in family law and commercial law. Our team of experts work closely together to ensure every facet of our client’s lives are considered and sheltered from life’s unexpected miseries.  We take a holistic approach to your matter and ensure that we provide you with advice that will conclude your matter ensuring your needs are met and your family is taken care of. We are at the forefront of all areas of law and stay ahead of the curb for the benefit of our clients. Call our expert team of lawyers today for advice about your family law matter, your commercial law matter or both.

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