Ann Robinson, Head of Family Law; and Lewis Goodwin, a Partner in the Corporate team at Blacks Solicitors, discuss what couples setting up a business should consider in the event of their relationship breaking down, and what your options are if this unfortunate event happens.
When a couple sets up a business together, they often won’t consider what would happen to the company if there were to be a breakdown in their relationship.
Have you prepared?
A variety of issues can arise when a divorcing couple holds shares in a family business. Couples should therefore consider these scenarios when setting up a business together to make sure they don’t run into issues should the relationship break down. Here are some questions you should be asking yourself:
- Do both spouses have equal control or is there the potential for one to control the company and prevent the other from having access to documents and information?
- If you have a directors loan account, do you trust that this won’t be used as a personal bank account with a large liability being run up?
- Will each party’s income from the company be maintained, or has one person voted themselves a higher salary?
Shareholders agreements
In the same way that couples might make a will to determine what should happen to their business and their other assets if either of them should die, it can often help if couples enter into shareholders’ agreements to help protect the business in the event of relationship breakdown. Such documents can include details of a range of scenarios, including:
- What decisions affecting the business can be made by a party acting alone without consulting the other, and what decisions will both parties need to agree on?
- What happens if both parties cannot agree on an important issue which leads the company into a deadlock situation?
- What would happen if one party wants to sell the business but the other doesn’t?
- If either party leaves, would they be permitted to set up a competing business?
What if you haven’t prepared?
If you haven’t prepared when setting up your business and the worst case scenario happens, there are a few different options you can explore when going through a divorce.
- Find common ground: It may be possible to reach an amicable resolution through careful negotiation, and of course this is the best possible outcome. If common ground has been reached it’s also advisable to negotiate a settlement out of court to reduce the risk of an unpredictable outcome.
- Split the assets: The first step when a couple divorces with a business involved is to consider whether an equal split of assets is appropriate, however this won’t always be the case. Every circumstance is different, and this is where preparation such as a shareholders’ agreement is crucial.
- Buy out: Another option may be to buy out your ex partner’s share of the business. One partner might be able to retain full ownership of the business while paying maintenance, or borrowings could be used to make a lump sum payment.
When it comes to a business divorce, there are lots of pitfalls which can create significantly more issues and therefore it’s highly recommended to secure expert legal advice both when a business is being established and in the case of a divorce to ensure fair settlements can be reached.
To secure more information on what couples should consider when setting up a business, please visit www.lawblacks.com or call 0113 207 0000 and someone will be in touch.
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