Going through a divorce is a complex, emotionally demanding process that can be extremely difficult for everyone involved. Additionally, when one party owns a limited company, the stakes are raised considerably higher, which often makes an already complicated situation even more stressful. If you are an owner, it’s important for you to be informed on the impact divorce can have on the company you have worked so hard to build.
In this blog, we will take a look at a common question we get asked, the answer of which can often catch people off guard during proceedings “Is a limited company protected from divorce?” We will also detail the practical steps you can take to safeguard your financial interests.
Entitlement to a Limited Company on Divorce
It’s important to remember that a limited company is not protected from divorce. As a financial asset it will be considered as part of the matrimonial pot, regardless of whether it was set up before, or during, the marriage or civil partnership. Therefore, the income that the business generates will be a feature in divorce proceedings. There are arguments that can be used to try and exclude assets as “non matrimonial” but that is its own subject. However, on the whole the business and its income will be considered.
The Limited Company and Divorce Process
What happens to a business during divorce varies from one case to the next. This is because the circumstances of each separation will also vary significantly. However, the first thing the courts will almost always look to establish in this situation is the business’s worth.
Valuing your business should not be done via an estimate. To ensure a transparent, and therefore more straightforward, divorce process, it’s important to present an honest valuation. Usually a single joint expert is selected and a formal valuation takes place. Three things that may be considered when establishing a valuation are:
- Assets: You must show all of your company’s assets, as detailed in your accounts. The balance sheet is very important, including your turnover, liabilities and net position
- Cash flow: It’s advised that you consider cash flow forecasts
- Similar company analysis: To be used if your business doesn’t have many assets and/or cannot predict future cash flow. Using a similar business as a baseline will help to gauge a broad understanding of the company’s value.
Transparency and specialist legal advice are a must during any divorce or dissolution, especially when a business is involved. It’s fairly common for business valuations to be contested, so getting an independent valuation, as mentioned above, could speed up the whole process.
Ultimately, it’s vital to understand the implications of your actions and the unique demands of your case. Therefore, enlisting specialist legal help is the best way to simplify a highly complex situation. This will ensure that you have a full understanding of your options in order to make an informed decision that works in your best interests.
Contesting the Valuation of a Business in Divorce
Answering the question, “Is a limited company protected from divorce in England and Wales?” can be challenging. Even if you believe you’re entitled to a fair share of the family business, the amount you finally receive will depend on how accurately it has been valued. In some circumstances this can lead to mistrust, inflaming an already tense atmosphere.
If you’re dissatisfied with the findings of the SJE, you might be able to argue for the appointment of a new expert. However, you will need to have more than just an inkling that something might be amiss. Divorce entitlement to a limited company can involve such significant figures that the courts may insist on receiving serious evidence in order to back up your claims.
For any sceptical spouses out there, it’s also important that you don’t take matters into your own hands. Starting an investigation could lead you to accessing documents that are technically someone else’s property — which is itself against the law. Instead, report any concerns to your family lawyer, and let them deal with it on your behalf.
How Do Freezing Orders Help With Divorce Entitlement to Limited Company?
Despite financial disclosure being mandatory in English and Welsh divorce law, not everyone will want to play fairly. If you believe that your spouse is hiding — or disposing of — business assets in order to deny full divorce entitlement to a limited company, there are steps you can take. One of the most effective of these is called a Freezing Order.
In essence, a Freezing Order is a type of injunction that stops someone from being able to oversee the disposal of their assets. It will impede them from transferring or selling any possessions that would otherwise be considered matrimonial. This can be especially useful for spouses who are only just starting to consider if a limited company is protected from divorce, as they may be less involved in day-to-day business operations.
To obtain a Freezing Order, you should first explain the reasons for your concern to your family lawyer. Because establishing these injunctions can be costly and complex, they will want to understand why your divorce entitlement to a limited company is at risk. If there is enough substance to your claim, they will submit the application to the courts and represent you when required.
How is a Limited Company Divided During Divorce?
Because of the variable elements at play in each divorce scenario, there is no single solution to dividing a limited company. What we can say with a degree of certainty is that the factors to be taken into account will include: the company’s size, the role and involvement of your spouse in day-to-day operations, and how many shares they own.
With this in mind, let’s take a closer look at the ways in which a limited company could be divided during divorce:
- Buy out: In cases where both parties own percentages of the business, you might offer to buy out your spouse’s shares in order to both maintain ownership and settle your financial obligations
- Offsetting: Essentially, this option considers if other assets are ‘in play’. As the business owner, do you have other assets you could divide with your spouse in order to retain control of the business? This could mean forfeiting the family home and/or other investments in order to maintain full ownership of your company
- Ongoing maintenance: You could agree to pay fixed spousal maintenance over a period of time. Effectively, this treats your former partner as a payrolled employee. This option is especially useful when the family business has been maintaining your shared lifestyle
In addition to these conventional approaches towards dividing a business, certain facts are fundamental in informing any decision made by the courts. Firstly, in the absence of alternative assets, it might be necessary to consider if the founder could transfer shares to their spouse. Finally, much will depend upon who owns the business. If one spouse founded the company, the court will probably look to ensure that it remains in their ownership.
Ultimately, it’s unlikely that the courts will insist that a limited company is sold in order to settle divorce proceedings, but it does sometimes happen.
Therefore, if you own a limited company, it’s essential to take specialist legal advice as soon as possible. Understanding the finer details of your situation could spare you considerable stress and expense in the long-term.
How to Keep Your Business During a Divorce
There are a few ways to make your business as ‘divorce-proof’ as possible. The most common of these include:
- Pre and post-nuptial agreements: While they’re not yet considered legally-binding in the UK, there is an increased tendency for courts to refer to pre and post nuptial agreements during divorce proceedings. The courts will look to ensure that any agreement was entered into with both parties having received legal advice and with total transparency about the business’s valuation
- Keep household and business finances completely separate: This will ensure that there is no grey area between the assets from the business and those that lie outside of that in the marriage
- Enlist the right solicitor: Finding a solicitor who is committed to non-confrontational resolution will save you time and expense. If you enlist a lawyer who is a member of Resolution, they will adopt a constructive approach to divorce proceedings wherever practical
Is Legal Advice Required When Divorcing as a Limited Company Owner?
Although there is no official requirement to receive legal advice during divorce, there is so much at stake that it should be regarded as non-negotiable. Even if you’re anticipating an amicable split from your spouse, it’s important to remember that no two divorces are the same, so you will benefit from specialist advice tailored to your personal circumstances. The right solicitor will work in your best interests to consider ‘hidden’ tax implications, identify possible additional costs, and navigate the least stressful path towards a suitable resolution.
Ultimately, legal advice is vital during any divorce, so is doubly important when looking to safeguard the future of your limited company.
You’re in Safe Hands with Lowry Legal
A lot of time and effort goes into building up a limited company, so not taking measures to protect it during a divorce would be inconceivable. Lowry Legal has extensive experience of helping high net worth individuals and business owners to navigate even the most complex divorce and civil partnership dissolution scenarios. We deliver straightforward, practical advice that is tailored completely to whatever challenges you are facing.
Therefore, if you want a highly experienced, full-service law firm that gets to the heart of your situation and prioritises the best possible outcome, you are in safe hands with us.
To speak to one of our specialist divorce lawyers, contact us today, or email enquiries@lowrylegal.co.uk.
