Australia is home to a large number of small businesses – figures released in 2016 reveal Australia is home to more than 2.1 million small businesses, up more than 21,500 on the previous year’s stats.
Data released by the Australian Bureau of Statistics showed that as of June 2015, Australia had 2,121,235 small businesses. Many of these are owned by husband and wife teams – so what happens to your small business if you decide to divorce?
Can Small Businesses Survive Divorce?
What are your options if you and your soon-to-be-ex run a business and decide to divorce?
One possibility is for both of you to remain in the business, divorced from the marriage while continuing as business partners. This can really only work if the divorce is amicable and you are able to rise above any emotional entanglements. You would need to retain enough respect and goodwill to cooperate so that customers and employees are not stressed by the relationship between the partners. Another possibility is that one ex-spouse finds a new partner which can add new stress onto the working relationship. If you have differences in business philosophy, differences in risk tolerance, acceptance of children into the business and different attitudes toward money, these stresses can erode the business relationship over time. Many small businesses simply cannot continue to operate with ex-spouses both still present.
A second scenario that sometimes occurs is that one spouse keeps the business and buys out the other who leaves the business. This assumes the business is profitable enough to sustain a buy out. Another possibility is to offset the value of the business with other assets in the marital pool. Often these assets are being used as security for business debts – which complicates the divorce and business relationship.
Another possibility that works in some situations is to split the business into areas of expertise with appropriate financial adjustments and each continues doing what he/she knows best.
The final possibility is to sell the business altogether and split the proceeds.
How Are Small Businesses Viewed In Family Law?
As with any assets owned by a divorcing couple, the value of the small business will be added to the marital pool for property settlement. Each spouse has an ongoing obligation to give full and frank financial disclosure. This means that business records, financial statements, bank records, BAS and tax documentation is to be compiled and provided to each spouse.
All business interests, whether in a partnership, sole trader, company or trust structure, can be treated by the court as “property” as defined by the Family Law Act and must have a value attributed to them.
Other Business Partners & Companies
A separation will have an impact on the other business partner(s). Not only will there be a change of focus by the partner who has separated; there will also be the requirement to give disclosure, which is often not welcomed by the third party partner(s).
The court will take into account any partnership agreement with the third party partner(s) and will consider the effect of the separation on the partnership and the third party’s rights.
If the business is owned by a company, and that company is a “family company”, where the shares in the company are held by the spouses, then it will be considered essentially an alter ego of the spouses and dealt with as a quasi-partnership.
If the business is owned by a company which has third party shareholders, because the business is an asset of that company, it is necessary to determine the value of the shares in the company.
In either scenario, the business will still need to be valued, and disclosure given, but the value of the shares will also depend on the balance sheet of the company. Often a common entry on the balance sheet is a director’s loan account. Whether it is a credit or debit, that loan will also need to be considered in the valuation of the shares and the determination of repayment arrangements.
Being in business together adds a degree to complication to any divorce. Always seek legal advice – contact us today to speak to our friendly, experienced family law team. We offer a FREE, 10-minute phone consultation.