Protecting Family Business from the impact of Divorce

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Keeping business and family life separate when you’re involved in a family business can be very difficult, if not impossible. When people get married or enter into a civil partnership where one party is involved in a family business, the dynamics of that relationship might impact on the business. This impact might be further exacerbated should the couple involved split up and, in many cases, the spouse or civil partner not originally involved in the family business might enjoy and unexpected windfall.

Before we go into any of that, please consider the implications of a divorce and how it can affect a family business.

  • A divorce might cause some disruption of the business through to a forced sale of the business;
  • If the structure of the ownership of the business is changed, it might convert an otherwise non-matrimonial asset into matrimonial property;
  • Any inherited wealth as well as any gifted or pre-owned assets may not be automatically protected from divorce claims;

In Scotland, it is possible to protect certain assets from future claims on divorce.

Over time, a family business is likely to grow out of its original structure. For instance, it may have grown from a sole trader business to a partnership, allowing other family members to be included in the ownership. Decisions as to structure might also be made for tax purposes. There may also be changes to the business structure in an effort to protect personal assets or to implement managerial decisions.

 Usually, it’s through the restructuring of a family business that assets are unwittingly converted into matrimonial property. Once that happens, that property can then be taken into account in divorce with the assets being valued and divided between the spouses.

Such restructuring changes might be a conversion from a partnership to a limited liability company, perhaps the creation of a holding company or maybe even a share exchange scheme. A share exchange scheme is where the shareholder  in one company is allocated shares in a different company. In many instances, these changes take place without any consideration being given as to how they might impact in the event of a shareholder being divorced. This is usually because divorce is the very last thing on the shareholder’s mind when working through the restructuring.

For instance, you wouldn’t want to restructure a business to save a small amount of tax every year if it then opens up the door to a significant claim by a spouse on divorce.

On some occasions, the divorcing spouse who has had had their own income throughout the marriage and had never contributed to or been involved in the business might find they have an entitlement to share in the value of the family business of their spouse.

Inevitably, if the business is successful, it can lead to problems for the business owns meeting a high claim from a spouse on divorce. Most small and medium sized enterprises don’t hold significant amounts of cash and any substantial claim will put the business under huge financial pressure and might mean that the business owners have to sell the business to meet the claim.  This kind of situation means not only hardship for the spouse who is being divorced but also for any other family members involved in the business.

It is still possible, in Scotland, to shelter certain assets from claims on divorce. It does, however, rely on timing and specialist advice. If you do have to deal with any restructuring or succession planning, it might be wise if the business owners and their advisers took a step back and included some specialist family law advice and how such restructuring or succession planning might expose the business to risk. By taking this step, you might just minimise that exposure and ensure the family business continues to be protected.

For more information, please get in touch.

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