Is a Company Protected from a Divorce?

If you’re the owner of a limited company and going through a divorce, understandably this will be a very stressful time.

You’ll be wondering how your business will end up financially after the divorce.

There can be a significant impact on your business when divorce happens. The important thing to remember is that there are many factors at play that determine this impact.

As divorce solicitors, we understand the magnitude of owning a business while a divorce is taking place.

In this post, we will discuss in detail what happens to your business during a divorce and how you can best protect it during divorce proceedings. 

Is a Limited Company a Marital Asset?

In short, if you own a limited company then it can be considered a marital asset.

That doesn’t necessarily mean that it will be divided up when it comes to divorce proceedings. 

The main objective of these proceedings is to gain a fair outcome for both parties.

The likelihood of you being in the exact same financial situation as you were before the divorce is very slim unless there are other high-value assets to be divided.

The reality is that both parties’ standard of living will take a dip to some degree once the divorce is finalised and assets are allocated.

Therefore, the courts might see it fit to divide up the limited company as a way to make divisions of assets fair for both parties.

You can argue that the limited company is not a marital asset if it was active before the marriage took place.

However, if the business was used to support your marriage and has contributed in some way during the marriage, it will be hard to argue it is not a marital asset.

It will more than likely be taken into account during divorce proceedings if this is the case. 

working through a divorce with solicitor

Can my Partner Claim Half of My Business in a Divorce?

When it comes to dividing company assets in the UK it is usually done through the courts due to its complexity.

In principle, your ex-partner could assert a claim to a portion of your company, even if they hold no actual stake in it. 

However, courts typically hesitate to interfere with a business if alternative solutions, like offsetting the value, are available. 

Any agreement reached must be equitable for both you and your former partner. 

If preserving the integrity of your company is essential, this might involve consenting to higher spousal maintenance payments or permitting your ex-partner to retain a larger portion of other assets.

For more information on the splitting of assets during divorce read our guide which covers if assets are split 50/50 in a divorce in the UK.

How Can I Protect my LTD Company in Divorce?

There are certain measures that you can take to protect your limited company during divorce proceedings.

Prenuptial or Postnuptial Agreement

A prenuptial agreement (prenup) and a postnuptial agreement (postnup) are legal documents that couples use to establish the terms and conditions of asset division, spousal support, and other financial matters in the event of a divorce or separation. 

While they share similar purposes, the key distinction lies in when they are created:

  • Prenuptial Agreement – A prenuptial agreement is a legally binding contract entered into by a couple before they get married or enter into a civil partnership. 
prenuptial agreements

This agreement outlines how the couple’s assets, debts, and other financial matters will be handled in the event of divorce, separation, or death. 

Prenups are typically created to protect the financial interests of both parties and can address a wide range of issues, including property division, spousal support, and inheritance rights.

  • Postnuptial Agreement – A postnuptial agreement is similar to a prenuptial agreement, but it is entered into after the couple has already married or entered into a civil partnership. 

Couples may choose to create a postnup for various reasons, such as changes in financial circumstances, the birth of children, or a desire to clarify financial matters that were not addressed before marriage. 

Like prenuptial agreements, postnuptial agreements are legal contracts that specify how assets and financial issues will be handled in the event of a divorce or separation.

Don’t Involve Your Spouse in the Company

Small business owners frequently opt to transfer or allocate shares to their spouses, appointing them as directors or company secretaries, or even hiring them as employees. 

Although such decisions may yield tax benefits, they can also open the door to the assertion that your spouse actively contributed to the company’s success and, therefore, has a legitimate entitlement to a share in the business. 

In specific circumstances, these actions might also trigger claims under employment law.

divorce paperwork.

Steer clear of additional forms of indirect engagement, including the acceptance of materials, unpaid labour, expertise, or financial contributions from your spouse for the business. 

Maintaining this distinct separation can bolster your position as the sole owner in the event of a divorce. 

Nevertheless, it’s important to note that the courts may still consider the business’s value as part of the overall marital assets.

Keep Business and Household Finances Separate

Another way to protect your business when getting a divorce is to keep your household and business finances completely separate.

Using the salary you pay yourself is fine to use for whatever you see fit.

Company profit is better to be kept within the business.

If you start using company profit for your household then the business will more then likely be used as a marital asset as it has then made a contribution to the marriage.

Even if you do manage to keep things separate then there is no guarantee that the courts won’t use the business in divorce proceedings.

If you can prove that the business has been completely separate from benefitting the household in any way you give yourself the best possible chance to protect it during a divorce.

How is a Limited Company Divided During Divorce?

If your company is being used to split up the family assets during a divorce there are a few scenarios that can play out.

Each case is unique and there will be factors at play which will determine how the company division is carried out. 

The answers to questions such as these will give a good indication as to what scenario will occur:

  • Is one party the sole owner of the business?
  • Are both parties involved? What is the extent of the involvement?
  • Has the business been used to assist in the marriage in any way?
  • What is the value of the business?
  • Are any business assets secured against the marital property? 

Now let’s look at the possible scenarios that can occur to your business during divorce proceedings:

filing divorce paperwork

Giving Up Other Marital Assets

If one party owns the business then the courts will do everything they can to keep this as the existing status of the company.

As a way to compensate the other party, the business owner will have to give over ownership of other marital assets, these include:

  • Family home.
  • Car.
  • Savings.
  • Investments.
  • Inheritance – For more information on this, please read our blog on divorce and inheritance.

These assets will usually be equal to or as close to the value of the business as possible in order to get a fair deal for both parties.

If the alternative marital asset falls short of a nearly even split then the business may be subject to division of ownership.

This could involve transferring shares of the business to the other party.

Buying Out

In the case where both parties own the business, it may be best if one buys the other out. This is a fair way to split the business as both parties can benefit financially. 

It can be an opportunity for a clean break for both parties with minimal room for discrepancies.

Ideally, the company’s articles of association and shareholders’ agreement should incorporate pre-emption rights and clear provisions detailing the course of action in the event of a divorce. 

This underscores the significance of establishing thorough articles and a well-drafted shareholders’ agreement when the business is first created.

It ensures a well-defined framework for addressing various scenarios, including the complexities that may arise during a divorce.

buying partner out of a business

Providing Support 

Throughout the duration of the marriage, the money that the business has been generating could have been sustaining the lifestyle of your marriage.

If a divorce occurs then a portion of the business’ finances could be sent to the other party whilst you stay in control of the business itself.

This option ensures that the business does not need to be split or sold as both parties will be benefiting from a financial standpoint.

This arrangement can be set up for a set period of time or indefinitely. 

Selling the Business

In very rare cases, if the courts cannot find a way to compensate the other party with alternative marital assets then the business may need to be sold.

The courts will only do this as a last resort as they prefer to keep the business within the family due to the financial security it offers. 

Another way that this scenario can potentially happen is if both parties own the business and neither one refuses to transfer shares.

This could be seen as stonewalling which is essentially when the communication between two parties breaks down.

How is a Business Valued in a Divorce?

Before the courts decide to do anything with the business they must first get an accurate valuation of it.

The valuation process of a company is quite a complex one but it is also a vital process. 

The process is time-consuming and costly but getting the right valuation is worth the investment. 

One of the more efficient methods of valuing a business is by getting an independent expert to conduct the valuation.

To save cost also there should be one appraiser between the two parties.

There are various aspects of the business that the appraiser will consider to make an accurate valuation:

  • Business assets – this includes all assets that belong to the business e.g. property, cash, stock. 
  • Comparable analysis – comparing similar businesses to get an accurate valuation. This is usually done when there aren’t many assets or if cash flow forecasts are inconclusive. 
  • Structure of the business – where the business is a sole trader, limited company or partnership.
  • Earnings – the forecasted earnings of the business. Cash flow is usually an indicator of this figure.

Protect your Business During Divorce 

The period of divorce can be a very stressful and daunting time for all involved, especially when a business is at stake. 

We hope that his informative guide can give you the answers to any doubts or questions you may have had beforehand about a limited company during a divorce.

If you would like to know more about protecting your company during a divorce or have any other related questions, we are happy to help.

We specialise in high-net-worth divorces and have a team of experts on hand who can give you industry-leading advice.
Contact us today and find out more.