No one ever plans to divorce. There are many challenges you face when separating from your spouse or common-law partner. This can intensify when you are forced to sell off assets from the business you built: due to the split. You may consider the business to be your life’s work. The built-up assets in the business are a symbol of the blood, sweat and tears you have invested over the years. Chances are that the business will need to provide for you, your ex-partner and children after the separation. This sets the stage for contentious arguments on how business assets should be divided. Here’s what you need to know as you navigate the sale of this murky emotional and financial landmine.
How invested is your ex-partner in the business?
If your partner played a key role in the business it may create additional complexity. Do they want to be bought out of the business? Do they want the entire business to be sold? Do they want to keep the business and find a way to work with you after the divorce? The possible strategies to handle the split will come out of how invested each of you is in staying involved in the business, how much cash is available to facilitate a buyout and the optimal strategy to divide the business from a financial standpoint.
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Getting to an Agreement on Valuation
What type of business are you in? It is knowledge-based? Do you have employees? Are their other factors unique to your industry? What would you get for your business if it was sold in the marketplace? Depending on the type of business you’re in, it may or not be worth it to get a formal valuation. Courts will typically recommend getting a valuator to conduct the appraisal in order to protect both parties from paying to much or receiving too little from the sale of the business. A valuation expert will consider the history, finances, assets and liabilities of your business as well as other aspects of your business to come up with a fair number.
Understanding the Tax Implications of Your Separation
Thinking through the strategy associated with legally separating is crucial. Specific recommendations around managing the timing of the separation from a tax perspective will vary depending on whether you are a spouse or a common-law partner. Keep in mind, the definition of a spouse for tax purposes is not the same as the legal definition of a common-law partner. In fact, before you can divorce a spouse and finalize the split of business assets, you would need to have been legally married in the eyes of the law. On the other hand, the definition of a common-law relationship means you are not legally married. The criteria you must meet to be in a common-law relationship is 1 of the three criteria: 1) You have been living together for the last 12 continuous months with separation periods of no more than 90 days 2) You are the parent of the child either by birth or adoption; and or 3) You have custody and control of your child, and your child is wholly dependent on you and your former partner for support. As a result, from a tax perspective, it is normally easier to separate from a common-law partner because of the 90-day rule. Seek the advice of a trusted tax professional before a formal separation or divorce to determine the most tax-effective way of dividing your business assets.
Spousal Rights on Business Assets from an Inheritance
Are you entitled to assets tied up in a business when going through a divorce? Inheritances, where you are named the beneficiary of the business asset, can be excluded from your net family property if the donor’s last Will or Deed of Gift was structured properly. Normally this would involve provisions in the Will that expressly state the asset should be excluded from your net family property. You would also need to keep all the documents associated with protecting sole rights to this as a business asset over time.
Previous Domestic Contracts Agreed To
Perhaps the best way to reduce the chance of legal disputes over your business assets in the future is to have a plan for separation when you start a relationship. For some people, contemplating the end of a union, in the beginning, may sound counter-intuitive, since you cannot imagine it all not working out. Unfortunately, recognize that sometimes marriage and common-law relationships fail despite you and your partner having the best of intentions. Setting up a “pre” or “post-nup”, or having a domestic contract in place means you can organize a plan to either exclude business assets in a separation or name the price you be willing to pay if things don’t work out ahead of time.
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