When a couple chooses to divorce it can be an emotional and complicated time. Add in business ownership and it can make the separation incredibly trying for the couple. As a family lawyer, where there is a situation of business ownership and a separation, it is important for me to get a good understanding from the start of how the business runs and that includes working with their accountant.
There are a couple of different circumstances that are common when it comes to business ownership. Firstly, there is often a situation where the husband and wife are in business together, be that a company or a partnership and they are the only people that own the business. Then there is the situation where the husband and wife are involved in a business with third parties. These third parties may include their extended family members, their children or independent third parties.
In these differing ownership structures, we often find that most financial separations have what I call a disadvantaged party and an advantaged party.
What is a disadvantaged party?
It’s not uncommon, particularly with older couples, that their marriage has worked along traditional lines. That is, the husband runs the business and the wife has been at home in a parenting role. So while the two of them might be the owners of the business (or the two of them are participants in a business with third parties), the wife has had little to do with the day to day running of the business. So one is mostly unaware as to how the business works, as well as its financing and profitability.
When I am acting for someone in these circumstances, the disadvantaged position, there can often be a reluctance for the husband to hand over business information. Additionally, the couple’s business accountant and banking relationship might lie predominantly with the husband too, which can mean getting a good handle on the financial situation can take time.
Understanding the business’ financial position
When a business is involved as part of a separation I work with the client, and often their accountant, to understand how they got to their current business financial position. As well I want to know the level of debt is, how that is being serviced, when finance is due to be rolled over, and what guarantees are in place. These guarantees are particularly relevant for older loans as the disadvantaged party may have been asked to sign the document without having a good understanding of what it entailed.
During a separation, and without legal support, it can be difficult to keep the lines of communication open about the family business. For example, the disadvantaged party will want to be regularly informed about the financial health of the business including sales figures, profit and loss and bank balances. If this is something that has always been in the domain of one partner, then tensions can arise.
Added complexity with third parties
The above issues can all exist within the confines of a ‘husband and wife business’. However, there is an added degree of complexity when they are in business with third parties. At no time can we assume that every stakeholder will be comfortable with every step in the process. Say, for example, you wanted to look to liquidate some assets, that is not just their decision as they need to get the agreement of the third parties too.
There are also added complexities as to how owners of the business are paid. Let’s say you have a partnership and the husband gets paid a wage and tax is then paid on this wage, that is quite a clean way of doing it. But it is often the case where people simply draw money out of the business, so then there is an expectation that has been debited against each party’s partnership account.
Which again is all well and good when it’s just a husband and wife partnership, but if the partnership involves third parties who are not husband and wife then all of the current accounts are relevant in working out what the value of the marital interest in the partnership is.
Understanding how money is taken out of the company
For example, if people own a business together as a company, there are only three ways they can get money out of the company:
- They can be paid a wage by the company on which they pay tax
- They can take money out via a loan account which also has tax consequences
- They can take money out as a dividend and if franked still involves further tax.
Depending on what approach has been taken, when I see people in a separation situation, sometimes I will have to make them aware that they have a substantial loan account with this company and they are not aware of how it works. They are not across the fact that everything that has been drawn out of the company over the last few years gets debited against a loan account.
In a post-separation environment, accountants are very cautious about debiting things equally. When there is no separation, they debit things in a method that sensibly is entirely motivated by minimising overall tax for the group. So they can end up with some balances that might make sense from a tax standpoint but end up disadvantaging one party in the couple.
Information gathering is key
The core focus when it comes to separation and business ownership is that very early on in the process, especially when acting for the disadvantaged party, a family lawyer will have to go on an information-gathering exercise with the client’s accountants and banks. The purpose of that exercise is so we can fully understand the nature of what the business is, the extent of the husband and wife’s interests in the business and get an understanding about what the options are in terms of how it’s value can be accessed.
When acting for the advantaged party, we have a duty to assist the other party in getting an understanding of how it all works and providing disclosure on a regular basis. Often this is something that the person who predominantly works in the business is not used to.
The role of accountants
In circumstances where there might be a reluctance to share information, litigation often results. As a family lawyer who has dealt with these cases before, I sometimes need to get a shadow accountant involved, as it is not a lawyer’s role to review business finances. A shadow accountant will act as a scrutiniser, so to speak. Reviewing the monthly figures and ensuring the business seems to be trading properly and is consistent with normal figures.
The value of the right team
This just goes to show that when you are separating and business is involved, having the expertise of the right team to do the information-gathering is essential. Especially if you are the disadvantaged party. You want to ensure you have advice as to how best to protect yourself from any implications from the business operations.
My role as a lawyer isn’t to find the tax and accounting solutions, but it is to spot potential problems. A good family lawyer has the capacity to know there could be a problem and refer it to the accountant for advice.
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Disclaimer: The content in this article provides general information however it does not substitute legal advice or opinion. Information is best used in conjunction with legal advice from an experienced member of our team.