A business is often one of the major assets to consider after a couple separates in British Columbia. Business owners may wonder what steps they can take to protect this asset during divorce proceedings.
Business assets are almost always considered marital property and, therefore, subject to B.C.’s equal property division laws. However, the laws are open to some interpretation and, in any case, dividing a business down the middle can be problematic.
Other complexities include how the business is valued, the ownership details, who is involved in the day-to-day operations, where the financial contributions to the business originated from, whether one or both spouses want to continue the business after divorce, and other such considerations.
With careful planning and a good understanding of your basic legal rights and responsibilities, you can take measures to protect a business in a B.C. divorce.
How are business assets usually divided in a BC divorce?
Courts in British Columbia generally aim to preserve the viability of a business when dividing assets in a divorce. They try to avoid orders that would require selling or liquidating the business—especially if it provides significant income to either spouse or supports employees—unless neither spouse wishes to continue operating it.
The Family Law Act legislation guides property division decisions (including business assets) for married and unmarried spouses in B.C. Family property is usually divided evenly, unless it would result in “significant unfairness”.
Family property generally includes any asset or beneficial interest acquired during the relationship—including a business—but excludes assets or beneficial interests acquired before the relationship began. The increase in value of a business or other pre-relationship asset is liable for property division, though.
So, if your business were valued at $2 million before the marriage began but grew during the relationship and is now worth $4.5 million, $2.5 million of the asset would be subject to community property division. Either your spouse would be entitled to a share of the business or compensation through the award of other assets.
Can I retain control of my business during a divorce?
One of the major concerns of business owners during a divorce is whether they can maintain control of their business. Planning and reliable legal guidance are key to maintaining control. Before you can decide exactly what to do with the business, you will need to consider the following:
Is the business considered family property?
If you owned the business before the marriage, you will need to work out the pre-marital value of the business, as this will be excluded property while any increase in value will be subject to family property division.
How much is the business worth?
You will need a professional business evaluation to determine how much your business is worth. An accurate evaluation must include all assets and liabilities, cash flow, and goodwill/intellectual property.
Strategies for retaining control of your business
The main planning and strategic options available to help you retain control of the business are as follows:
Draft a prenuptial or postnuptial agreement
Marriage or cohabitation agreements made before or after the marriage or cohabitation started can specify what happens to a business after separation. They are often recommended in high-net-worth divorces, including those that involve a business brought into the relationship. If the agreement is drafted correctly, legally valid, and does not result in significant unfairness, the B.C. courts should uphold its specifications. However, you need the foresight to plan, and both partners must take independent legal advice before signing the agreement.
Use a corporate structure or create a trust
Another planning step to consider when creating the business is how it will be structured. Creating a trust (where shares or assets are managed by a trustee) or corporation before the marriage starts may protect the business from direct property division during a divorce. However, the business’s value may be considered when calculating assets, and you should seek legal advice before taking this step. Never try to change the business structure after the marriage ends in an attempt to “shield” assets from your partner, as this strategy could backfire.
Negotiate a settlement agreement with your spouse
A common way to retain control of a business is to work with your spouse to negotiate a mutually beneficial settlement agreement. If the business is considered marital property, you will likely need to cede other valuable assets or arrange a payout to your spouse in return for retaining sole control of the business.
Buy out your spouse’s share of the business
Because a business cannot usually be divided down the middle and remain functional after the owner-spouses separate, a common solution is to offer to buy out the spouse’s share of the business. The buyout may be structured through a lump sum or regular payments.
Contest an equal business division
Another option to retain control of your business during a divorce is to provide evidence that your spouse has contributed minimally to the business. Sometimes, a compromise can be reached with the spouse or, if the matter ends up in court, an equal division of the business can be shown to be “significantly unfair”. However, this argument can be challenging, and success usually requires strategic planning, good legal advice, and credible financial/business valuation evidence.
Use mediation or arbitration
Mediation or arbitration may be the best way to ensure you retain control of your business, allowing resolution of disputes privately without the stress, expense, and delays involved with court hearings.
Steps to protect your business in a divorce
In addition to the above, there are a couple of general steps that can help you protect your business during a divorce.
Firstly, as the business owner, you should keep detailed and accurate financial records so that a “paper trail” of transactions, assets, business health, and overall business value can be tracked over time. This makes it easier to gather evidence that protects your control of the business in the event of a divorce.
Seeking prompt advice from a financial advisor, business litigation lawyer, or accountant is advisable for business owners considering separation.
It is important, too, to make a note of your separation date. This is a key date when determining what property, including business assets, is considered family property, which can be hotly disputed in some cases.
Keep in mind, however, that the value of family property is determined at the date of the agreement dividing property or the date of the court hearing, not necessarily the separation date. The key valuation date, therefore, is often later than the separation date.
Keep a note of any changes to the business (assets, value, etc.) after the date of separation, to help protect your interests.
Do not wait until divorce proceedings start to protect your business. You can take steps well in advance to ensure that you maintain control of the business and do not end up relinquishing assets unnecessarily.
The property division lawyers at Legalbird can review your situation, explain your options clearly, and help you understand the best path forward. For a free 30-minute case evaluation, contact the team at Legalbird today.
