What happens to a business during divorce?
What happens to a business during divorce proceedings?
Q: Will the court ignore my business when deciding the settlement?
A: No. Business interests frequently form a central part of the financial settlement in divorce. While courts are often reluctant to disrupt the smooth running or ownership structure of a company, they will still assess its value and the income it provides—or could provide—to fund any financial settlement or spousal maintenance.
2. Why is determining business value and income so important?
Q: Do we really need a detailed business valuation?
A: Yes. Valuations help clarify the company’s worth and how much income it can generate, both now and in the future. This ensures the final settlement is fair. Courts usually instruct an independent accountant (valued jointly by both parties) to assess the business. However, this approach sometimes leaves limited scope for investigation if complex financial matters or potential misrepresentation are suspected.
3. Can business figures be manipulated during a divorce?
Q: What if one spouse tries to lower the apparent value of the business?
A: Emotional tension often runs high, and a business-owning spouse may claim the company has little or no value or produce misleading figures to reduce maintenance or asset sharing obligations. Such manipulation is risky. If discovered, courts can reopen proceedings if fraudulent misrepresentation is proven.
How does HM & Co. Solicitors approach business valuation?
Q: Do you work with external accountants or have in-house expertise?
A: We are unique in having our own team of in-house forensic accountants who focus solely on supporting clients through this process. They assist with disclosure, investigate financial accuracy, and address any tax-related issues. By collaborating closely with our family law solicitors, our accountants provide swift, tailored advice without relying on external referrals.
5. What if both spouses have shares in the same company?
Q: How does the court usually handle shared business interests?
A: The courts generally prefer a clean break, especially if only one spouse is actively involved in day-to-day operations. Transferring shares entirely to that spouse, however, may trigger tax implications such as Capital Gains Tax (especially for investment or property-based companies) and loss of personal allowances if one party was previously drawing salary or dividends. We help clients navigate these complexities to avoid any unintended outcomes.
6. What tax issues could I face when business ownership changes?
Q: Are there tax consequences if shares are transferred to just one party?
A: Potentially, yes. If you consolidate shares into a single person’s ownership, you might lose personal allowances and basic-rate tax bands, leading to an overall reduction in net income. Additionally, certain share transfers can attract Capital Gains Tax (CGT), depending on the company’s nature (e.g., if it’s an investment property company). Our legal and in-house accountancy teams can advise on the best structure to minimise these financial risks.
Need Specialist Legal Advice? Contact HM & Co. Solicitors
Address: 186 Lower Road, Surrey Quays, London SE16 2UN
Telephone: 02071128180
Email: info@hmsolicitorsltd.com
If you require guidance on dealing with businesses during divorce, our dedicated team of family law solicitors and in-house forensic accountants can help you navigate the process and protect your interests.
Your Questions, Answered
FAQs
Business Structures and Their Significance in Divorce
1. Sole Trader
Q: What is a sole trader, and why is it relevant to divorce?
A: A sole trader is an individual who owns and runs a business under a trading name (if they wish). They are personally liable for any debts, and all profits or losses belong to them personally. In a divorce, the court will consider these business assets (and liabilities) as part of the marital pot.
2. Partnerships
Q: How do partnerships differ from sole traders, and what types of partnerships exist?
A: Partnerships can be:
- Unincorporated: Partners share ownership of assets and bear personal liability for debts.
- Incorporated (e.g. Limited Liability Partnership/LLP): Partners have limited personal liability for debts.
Each partner is taxed on their share of profits. The partnership arrangement may be formal or informal. During a divorce, questions of each partner’s share in the business can significantly affect the financial settlement.
3. Limited Companies
Q: Why is a company’s structure important in a divorce?
A: A company is a separate legal entity from its owners (shareholders). Directors (who may also be shareholders) are employees of the company under PAYE, and they may also distribute profits via dividends.
- Tax Efficiency: Directors often choose how and when to pay out dividends.
- Financial Disclosure: Courts look beyond what has been drawn as income and consider what could be taken out as salary or dividends when determining spousal or child maintenance.
Types of Business Valuations
1. Income Stream-Only Businesses
Q: What if the business is simply me providing a service and has no real ‘saleable’ asset?
A: Sometimes referred to as a “professional practice” or “single-person trades,” these businesses typically have little or no sale value. The court generally treats them as sources of income rather than assets with value for division. The net assets in the business and its potential to generate earnings are still relevant for maintenance purposes.
2. Property or Investment-Based Businesses
Q: How does the court approach a property- or investment-focused business in divorce?
A: For property/investment entities (e.g. property holding companies), the court will look mainly at the value of the underlying assets. Any valuations should account for potential taxes arising from a future sale and distribution of funds. The updated balance sheet will help determine an appropriate figure for financial settlement purposes.
3. Trading Businesses
Q: How are trading businesses valued, and what does this mean for spousal maintenance?
A: For businesses aiming to make a profit (other than sole-trader income streams), valuations typically rely on annual maintainable earnings multiplied by an agreed price/earnings ratio.
- Adjustments: May be made for debts, surplus assets, or minority shareholder discounts.
- Relevance to Maintenance: The maintainable earnings figure also sheds light on how much income could be made available to one or both spouses.
Key Takeaways
- Business Ownership in Divorce: Courts won’t ignore business interests if they form a significant asset.
- Valuation & Income: Profits, share ownership, tax considerations, and potential future income are all relevant to financial settlements.
- Professional Advice: Engaging accountants, financial advisers, and solicitors with expertise in family law is crucial to ensure fair and accurate financial disclosure and valuation.
Need More Information? Contact HM & Co. Solicitors
Address: 186 Lower Road, Surrey Quays, London SE16 2UN
Telephone: 02071128180
Email: info@hmsolicitorsltd.com
Our specialist family law solicitors and in-house forensic accountants have the knowledge and experience to guide you through the complexities of business interests in divorce.
Types of Business Valuations
1. Income Stream-Only Businesses
Q: What if the business is simply me providing a service and has no real ‘saleable’ asset?
A: Sometimes referred to as a “professional practice” or “single-person trades,” these businesses typically have little or no sale value. The court generally treats them as sources of income rather than assets with value for division. The net assets in the business and its potential to generate earnings are still relevant for maintenance purposes.
2. Property or Investment-Based Businesses
Q: How does the court approach a property- or investment-focused business in divorce?
A: For property/investment entities (e.g. property holding companies), the court will look mainly at the value of the underlying assets. Any valuations should account for potential taxes arising from a future sale and distribution of funds. The updated balance sheet will help determine an appropriate figure for financial settlement purposes.
3. Trading Businesses
Q: How are trading businesses valued, and what does this mean for spousal maintenance?
A: For businesses aiming to make a profit (other than sole-trader income streams), valuations typically rely on annual maintainable earnings multiplied by an agreed price/earnings ratio.
- Adjustments: May be made for debts, surplus assets, or minority shareholder discounts.
- Relevance to Maintenance: The maintainable earnings figure also sheds light on how much income could be made available to one or both spouses.
Key Takeaways
- Business Ownership in Divorce: Courts won’t ignore business interests if they form a significant asset.
- Valuation & Income: Profits, share ownership, tax considerations, and potential future income are all relevant to financial settlements.
- Professional Advice: Engaging accountants, financial advisers, and solicitors with expertise in family law is crucial to ensure fair and accurate financial disclosure and valuation.
Need More Information? Contact HM & Co. Solicitors
Address: 186 Lower Road, Surrey Quays, London SE16 2UN
Telephone: 02071128180
Email: info@hmsolicitorsltd.com
Our specialist family law solicitors and in-house forensic accountants have the knowledge and experience to guide you through the complexities of business interests in divorce.
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I have been using HM & Co. Solicitors since Feb 2020 for my Non-Molestation order and Child Arrangements proceedings. Since using them I have had two amazing solicitors on my case, Felicia and Ayesha.
This has been the first time I have ever been to court and had been quite nervous, especially due to the sensitivity of the proceedings. Felicia and Ayesha have been nothing but patient, professional and understanding.
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If anyone is ever needing of legal help relating to Domestic Violence or Child Arrangements, I will always recommend HM & Co. Solicitor, Felicia and Ayesha.
Thank you again for all your help and support!
Love to say a massive thank you to HM & Co.Solicitors for a job well done on my two cases, really excited with the way my case was handle by Miss Daisy was amazing with good communication with client, very supportive, professional. I will recommend them to anyone experiencing legal/family issues and need legal advice/support. Miss O Adesina.
HM & Co. Solicitors are so helpful from receptionists right to the solicitors. I've had a few applications made to the court, which includes a non molestation order, recovering my son's passport from his dad and also arranging visits and Felicia is such a professional, organised solicitor who knows her staff so well. She is a blessing and willing to help. She thinks outside the box, and finds solutions in the blink of an eye! Besides her expertise in this field, she will not hesitate to speak up and stand firm when necessary. I am very grateful for her and the company who are so supportive and helpful. Highly recommend!
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Michael, our solicitor, explained the process clearly so it was not stressful, and acted efficiently to speed up the process. He also ensured we did not exchange immediately due to uncertainty over building works, which saved us a lot of money in the long-run. His judgement calls were excellent and ensured we came out with the best deal possible. I would not hesitate to work with HM &Co Solicitors again.
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