What Happens to the Family Business If We Divorce?

After the breakdown of a marriage, there are a range of separate legal processes that need to be worked through:

  •       Divorce and Separation. This is the legal severing of the marriage itself;
  •         Property Settlement. Working out how the property of both parties to the marriage (‘parties’) is to be distributed;
  •         Any ongoing spousal financial support or ‘maintenance’ to one of the parties;
  •         Arrangements for ongoing childcare, parenting responsibilities and any child support payments.

Our focus in this blog post is the connection between divorce and business: More specifically, property settlement, and how assets of any family business should be dealt with on marriage breakdown. One pervasive family law myth is that the family business is completely separate from marital assets: This is not generally true. 

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How Are Family Business Assets Broken Up?

In order to determine who is entitled to what, the assets of each party, both held in their own names and collectively, is pooled. In addition, other assets which parties have some degree of control over (such as beneficial ownership via a trust) may be added to the pool. 

So, given that it can be included in the pool of marital assets, how does the family business get divided on separation or divorce? In short, just like any other asset. There is no simple rule for division of any property on separation or divorce in Australia. Rather, it is a matter of the couple working out a ‘property settlement’ between themselves. Whatever the couple agree to can be formalised in a binding financial agreement or via applying to the court for consent orders. 

If the couple cannot agree on how property is to be divided (as well as other financial considerations such as the provision of ongoing financial support or ‘maintenance’ to one partner, and any ongoing child support payments), the couple should seek mediation. If that does not work, the couple will need to apply to the court for an order on property settlement to be made.

How Will the Court Make Its Decision?

In making its decision as to who gets what, the court does not follow any precise rule, but rather, under section 79(2) of the Family Law Act 1975 (Cth), makes the determination that would be ‘just and equitable’ in the circumstances. In making this decision, a range of factors are considered as set out in that section.

There are features of family businesses that make them more difficult to divide in a property settlement. Two of the most difficult features are:

  •         Working out how much each party contributed to, or is involved in, the business, and
  •         Valuing the business. It is likely that an independent valuation will need to be sought. This will take into account a range of factors including the past earnings of the business, projected earnings, and the balance sheet of the business.

An alternative is for the parties not to divide the family business and continue working in it together. Of course, this will only be a realistic solution where the end of the marriage is amicable. 

Does This Happen to De Facto Couples?

Yes, similar principles apply to de facto couples for the settlement and division of property under the Family Law Act 1975 (Cth). Note that different legislation applies to de facto couples in Western Australia, compared to the rest of Australia.

How to protect your business in case of divorce or separation?

There is no completely failsafe way to ‘island’ or separate your business from becoming part of the pool of marital assets. However, there are a few key steps it is recommended that you take:

  •         Separate the business entirely from the personal finances of both spouses. Consider running the business through a limited liability company, and paying each spouse a fair market salary for their contributions to the business. This will make it more transparent what the contributions (and rewards) from the business have been at the point of separation;
  •         Enter into a binding financial agreement before or during the marriage (when prior to marriage these are often known as ‘pre-nuptial agreements’), spelling out how the family business is to be dealt with. It is essential that both parties seek independent advice from a family lawyer before signing such an agreement.

Conclusion

In general, family businesses can be considered part of the pool of marital assets, to be settled and potentially divided, on separation or divorce. If you desire to keep a family business out of the marital assets in the case of separation or divorce, it is recommended that you talk to a specialist property settlement lawyer. For lawyers experienced in both the commercial and family arenas, get in touch with a leading Sydney law firm.

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