Simon Mortimer, a Partner in the family law department of Burnetts Solicitors in Carlisle, Cumbria looks at some of the issues which might face married or cohabiting business owners when they split up.
According to the Institute for Family Business, 65% of all businesses in the UK are family businesses and 42% of private sector employees work in a family-owned business. So, when the relationship between husband and wife entrepreneurs breaks down, the consequences can go far beyond their own families, affecting the financial security of the business itself and the jobs of their employees.
In Cumbria it’s particularly important that business owners prepare for the worst because our local economy is especially reliant on family-owned businesses in the agricultural and hospitality sectors.
When the Arctic Systems Ltd case was decided in the Courts last year in favour of the tax payers Mr and Mrs Jones, the only person crying was the tax man. However, if Mr and Mrs Jones were ever to divorce then the smiles might be on the other side of their faces.
In the Arctic Systems Ltd case Mr and Mrs Jones each held a share in the family company. Mr Jones was the sole Director and Mrs Jones was the Company Secretary. Both were paid a salary and the House of Lords approved this as an arrangement to keep down the tax bill. However, when the marriage fails in a husband and wife business like this, there can be significant problems such as the couple failing to agree how to run the business, the books not being done, employees being given conflicting instructions and in the worst case scenario one or other of the couple raiding the company bank accounts!
In the longer term there can be difficulties such as how does the company meet the requirements of Companies House if the couple each hold the same number of shares but cannot agree any decisions. If they trade as an unincorporated partnership, then even though one of the partners may be the major breadwinner, if they are treated as equal for tax purposes to use up the lower tax rates, it can be difficult then to argue they should not also share the profits and assets 50/50 or each pay 50% of the debts.
The approach of the Divorce Courts is very often to divide assets equally unless one or other party’s needs are particularly pressing e.g. because they have to look after the children. This approach often makes it less important to decide who owns what in the business because the Court will often consider the whole business to be part of the marital assets and therefore available for distribution between the parties. However, the Courts will recognise that if the business is the major source of income for the family, there is no point in forcing a sale and closing the business since that will be shooting the goose that lays the golden egg and will often, for example, result in the husband having no means to pay maintenance for the children or his former wife.
These types of problems can be overcome. Where the business has been started by one or other spouse prior to their marriage, a pre nuptial agreement could set out what would happen in the event of the marriage breaking down. Such agreements are not binding on the Courts but they are gaining in influence. We all take out insurance against things we hope will never happen such as a car crash, so why not have an agreement to deal with a marriage breakdown when after all one in three marriages now ends in divorce?
If the business is started up after the marriage, then it is important to build into its structure ways of dealing with the possibility of a marriage breakdown, for example, in the Partnership Agreement or in determining how the shares are going to be held.
Fortunately in a divorce we have a comprehensive system of laws which are fairly settled to help us sort out what should happen. However, with the increasing number of unmarried couples we are now facing more difficult situations to sort out when they enter into a business together or even when one or other of them has a business on their own but the other partner has some sort of passive involvement in it e.g. one of the couple operates a business out of premises which they both own. In a situation like that, the co-owner who has nothing whatsoever otherwise to do with the business can apply to the Court to force a sale of the premises, which can have disastrous effects on the business. The government recently had the opportunity to bring in a cohabitation law but has deferred the chance until there is research on the Scottish system which is already up and running. This makes it even more important in the case of unmarried couples that they set up the business carefully having an eye to what might happen if their relationship breaks down.
For expert advice on divorce and separation for business owners, contact Simon on 01228 552222.
About the author
Simon is Head of Private Client Services.
Published: Friday 27th June 2008
Categorised: Family Law