Mid Mountains Legal Blog

Separation and Business Ownership

Anthony Steel

When a de facto or married couple separate, there are time limits within which a division of assets known as the property settlement process must occur. Any business interests, trusts and inheritances must be taken into account as property of one or both parties to the relationship.

A property settlement is required at the end of both a de facto relationship and a marriage.

How are business assets divided after you separate?

One of the first steps in the property settlement process is that both parties to the relationship must provide ‘financial disclosure’: each is required by law to disclose to the other all of their financial information, including business interests.

This requires full and frank disclosure of all assets owned before the commencement of the relationship and acquired during the relationship – either solely or jointly.

Business owners must undertake a valuation of any business interest. This is irrespective of whether one or both parties have business interests and one or both parties are involved in the same business. Where there are doubts as to the accuracy of the business’ valuation, a forensic accountant may be brought in to verify the original valuation.

Once your lawyer has the full picture, they can advise an estimated range of what the property settlement outcome will be, which is expressed as a percentage. For example, between 55-65%. No lawyer can ever provide an exact percentage, due to the discretionary nature of how a settlement is determined. That is, how a Judge may rule if your matter ever were to end up in Court, is never guaranteed. Similarly, if the parties reach agreement without the Court ‘s involvement, they generally negotiate an outcome within that framework.

Ultimately, regardless of the overall property split, whether business assets need to be divided at all, will depend on whether the other person’s entitlement can be funded in another way.

Can you lose your business in a separation?

Yes, it is possible. While there are asset protection mechanisms available to minimise such risks, your business forms part of the property pool and may need to be sold to pay the other person their entitlement.

Selling the business or selling off its assets may be required if there are insufficient funds to fulfil the terms of the property settlement agreement (or Court decision). However other options can often be negotiated to reduce the risk of this being necessary.

Can I sell my business before separation?

You can sell your business at any time. However, that will not disentitle your former partner or spouse to any of the proceeds of the sale. It is prudent to consult with your accountant and lawyer if you are considering selling before taking steps to separate.

Are you the advantaged or disadvantaged party, or neither?

Even where both parties to the relationship have been directors in a business, one person considering selling before has more clarity and insight about how the business is run day to day and the finances of the business. Often, one party may be considered ‘the advantaged party’ and the other ‘the disadvantaged party’.

One party may be disadvantaged because, in addition to the significant emotional load that comes with separation, they find that they are required to get up to speed about the profitability and operations of the business, which can take considerable time. If the other part is reluctant reveal information, that adds additional time and stress. This is common where one party has had the more significant relationship with the couples &/or business’ accountant.

Information to gather early

For parties with business interests between them, their most pressing need is to have access to:

  1. The financial position of each business; and
  2. How funds are being taken out of each business.

Where this information is not provided quickly and easily, legal advice about how to approach this will help to expedite access.

Business financial position 

It is not your lawyer’s role to review the finances: you and your accountant must provide this information. To calculate the property settlement range accurately as possible and structure a settlement, additional information we need includes:

  1. What debts exist in the business;
  2. How those debts are managed; and
  3. how any loans are serviced, if any bank guarantees are in place, and if a rollover period is looming.

How Money Is Taken Out of the Business

Funds are taken out of the business in different way depending on the structure of the business. For example, in a company structure where both parties to the relationship are directors, you may be paid through one of three methods:

  1. By wage (income taxable);
  2. By director’s loans (which also has tax consequences); and
  3. By dividends (which can have tax consequences if franked shares).

Steps have often historically been taken to minimise overall tax for a business and its directors. However, those steps may no longer benefit one party to the relationship. Working together, your lawyer and your accountant can obtain the information required to pre-empt potential risks and help the property settlement process progress.

Separation and Business Ownership. Be Informed.

Whether you consider yourself an advantaged or disadvantaged party, where businesses are involved, separation can derail well laid plans and place your business and your life on pause.

Early decision making without legal advice can negatively impact you and your business. A good lawyer will be able to spot potential issues for you and arm you with insights to make better decisions.

Careful selection of who you take advice from and getting it early, is the first step in making the process of separation and business ownership considerably easier, faster and more cost effective. The later you bring in lawyers to try to fix the consequences of decisions and actions, the higher the likelihood of escalated and drawn out disputes.

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