In a time when both our business models and relationships are being tested to their limits, it is important to understand how the breakdown of a relationship can affect your business. Experts at Allard Bailey Family Law explain how to safeguard your business from issues in your personal life.
If you are in a happy relationship it might not feel like a natural thing to consider, but when you are in business you need contingencies for all sorts of situations that may or may not happen. The reality is that relationships do break down and this is a situation that can have a greater impact on your business than most people realise.
In this article, we highlight issues to be aware of and steps you can take to protect yourself, your business and any business partners you might have.
How can marriage/civil partnership breakdown affect your business?
Put simply, marriage or civil partnership is a contract in which you agree to share everything including your assets, finances and debt equally. A business is an asset that you can share, which means your spouse could be awarded up to 50% of your business. Scary right? You may need to buy them out or they could become your new business partner – even if they had no previous involvement. Just look at Jeff Bezos and his $38 billion divorce - where his wife received 25% of his company.
Around 42% of marriages end in divorce, so if there are two business partners there’s always a chance, however small, that one of their relationships could fail. If your business partner does not want to be in business with your spouse, you should consider acting upon the protections available to you.
Protect your business by preparing for the worst case scenario
The best way to protect yourself is to take out insurance before the event. The obvious place to start is a Prenuptial Agreement (prenup) if you are getting married or a Pre-Registration Agreement if you are planning a civil partnership. Both vary the standard contract and set out what you think should happen to your assets if you separate. It might not be the most romantic conversation, but it is one that more people are having than you might realise. In fact, it has been found that prenups lead to a stronger marriage.
A typical scenario would be a couple who are planning to tie the knot, one is a business owner and the other employed, so they both have separate incomes. They decide to get a prenup so the business owner can make sure the business and his business partner are protected. Why? Because the business could be considered as a family asset capable of sharing, even though it was established before they got together.
A prenup is NOT 100% legally binding
Did you know that prenups aren’t foolprooft? Courts in the UK will generally give prenups significant weight and they are often followed if they are drawn up properly and are fair.
Key points to note:
1. You must both enter into the agreement willingly.
2. The agreement should be reached and signed well in advance of the wedding – 28 days as a minimum.
3. There needs to be full disclosure of your financial position to your partner and vice versa.
4. You must both be provided for.
5. Both of you should have the benefit of legal advice to make sure you fully understand what you are agreeing with.
If you want to protect your business, it is not as simple as both signing a piece of paper to say the business is yours.
For the prenup to be fair one of the things you will have to demonstrate is how you will both be provided for if you separate. You can ringfence the business, but only if you have an alternative way for your spouse to be compensated, or they have assets of their own that they can keep and therefore that would be fair. If the prenup meant you would be comfortable, but your ex-spouse was in financial hardship that might be problematic for the court and it could be disregarded.
Equally, if there are not sufficient assets to go around without including the business, you need to be aware of that before formalising your relationship, so there are no nasty surprises later. However, there are lots of options you can consider including limiting your spouse’s share to a percentage of the business’s value added after you wed. If you find yourself in the position that you have to allocate shares, you could include stipulations about the level of involvement your ex-spouse can have.
What if you are already married or in a civil partnership?
If you got married without a prenup or set up a business after you were married, you can prepare a Postnuptial Agreement. These are like prenups but can be put in place after the ceremony. Similar rules apply in that they must be fair, legal advice should be taken and it is important that no one feels any pressure to sign. They are becoming more common among those who found companies after they got married. This is to ensure the other founders can be sure that, as far as possible, their joint enterprise is protected.
If it is too late to put a Postnuptial Agreement in place, it will help if your business finances were kept separate from your personal family finances. This is a simple step that is easy to achieve by setting up a business bank account, especially at the beginning of a new business venture.
Just don’t get married and you’ll be fine, right?
The fastest-growing family type in the UK is couples who are living together without formalising their relationships. In this situation, there is often a mingling of private money and business money, or the lines between romantic partner and working partner become blurred. For example, where loans have been made between a couple but there is no documentation to show whether the money was given as a loan, a gift or in exchange for a share in the business.
This is often because couples believe the common myth about “common law marriage”. In other words, many don’t realise that their rights will usually be far more than if they were married or in a civil partnership.
These situations can be difficult to resolve so it is crucial to document your intentions regarding any loans or shared finances and assets - to protect yourselves and the business.
Another common situation is where a business is owned by one person and their partner agrees for business loans to be secured on their jointly owned home. The intention is that the loans are secured against the business owner’s half of the property, but that is not documented. If the relationship breaks down, they are both liable for the loan secured on the property. If the split is amicable, you can sort this out between you, but separation is rarely amicable.
Because unmarried couples often have a more complicated way through the courts to separate assets, experts at Allard Bailey always recommend that couples moving in together.
This is even more crucial if they are also working together or investing in each other’s businesses – prepare a Cohabitation Agreement. A Cohabitation Agreement is a legal contract setting out your intentions regarding ownership and division of your assets. If properly executed, it will almost always be upheld by the Court.
Why do you need a Cohabitation Agreement?
Separation is hard enough. If you have been living and working together it can be even harder, so it is important to think about how you are going to own assets from the outset, well in advance of any possible separation.
It is not enough to say everything is in my name so I will be ok. It is true that if you are not married you do not have the same automatic rights to share someone else’s property, but it is possible to acquire rights and it is generally a lot more expensive to sort out legally. Why take that risk when it is easier and more cost-effective to agree on what is fair when you are still working towards a common goal?
Employing your spouse
There are separate issues if you employ your spouse or romantic partner in your business, often relating to one of two scenarios:
1. Where business owners employ their spouse and pay them a salary, but their spouse does little or no work for the business. Not only could that potentially be fraudulent from a tax perspective, but it is also very difficult to say later that your partner was not really involved with the business, which could affect the share they would be awarded by the Court.
2. The second and more common scenario is when you are genuinely employing your partner but have not defined the parameters of that employment. If you were employing anyone else, even a business partner, you would have an employment contract or some form of partnership agreement in place and you should have one of these for your romantic partner as well. Remember, you should always pay the market rate for the job they are doing so if there is a disagreement at a later stage, it is clear what their employment status has been.
Also remember, you cannot dismiss someone from their job just because you are separating from them.
What can you do for your business if you are considering separation?
The first thing the experts at Allard Bailey advise is that you speak to a solicitor. Find someone who will give you proper, balanced advice - not someone who is happy to have a fight with your money. For example, Resolution is a good starting point.
Resolution is an organisation of family solicitors who are committed to working with families and individuals to resolve issues in a constructive way, so they will focus on helping you to find a workable solution.
It is important that you feel comfortable with your solicitor as this could be a long journey and there may be a lot to sort out.
Many family solicitors will be happy to have a short call with you so that you can get a sense of how they work and their experience of helping business owners, which can be a helpful step.
You should be aware that If you are married and you are starting the divorce process one of the first things that you will need to do is go through what the courts call disclosure, which is essentially telling each other all the details of your assets and potentially your business assets. You may need to have your business assets valued, so it is important you speak to someone who can guide you on how to do that.
This stage can be a bit of a shock for everyone.
”We have had clients who have been enjoying a lavish lifestyle believing their spouses business is booming only to find they are in huge debt, as well as clients who are doing much better than their spouse was aware. Whatever your situation, the right solicitor will help you to find a practical resolution.”
Allard Bailey Law
There are lots of routes available for you to resolve things and it is often both possible and preferential to do so without going to court. A good solicitor will help you assess which is the best route for you, considering mediation, arbitration and negotiation as well as Court, and give you the level of support that you need to help you resolve the knotty issues you can face on separation. No matter how daunting it seems right now, there is always an answer as to how to divide assets and move forward.
As a business owner, you may expect your professional life to impact your personal life, but many people do not realise the extent to which their personal relationships can affect their business. The key to protecting your business is to be realistic and fair. Not just for yourself and your (future) spouse, but for the sake of your business, employees, suppliers and the customers and who are relying on you.