Any business owned by a spouse needs to be evaluated at the time of separation or divorce.
The spouse’s net family property is calculated after deducting the value of the business on the date of marriage. The business will need to be valued again at the time of separation. Any increase in business value during the marriage is divided equally between the spouses.
What are Legal Implications of Divorce on Business?
As per Family Law Act, all businesses are treated as property by the court and need to be valued. All kinds of business interests are to be included in the property of the spouse managing them, including partnership, sole trader, company or a trust. Divorce is likely to affect the different kinds of business based on their nature and structure.
When one spouse is the sole trader, they are deemed to possess the necessary skillset to run the business. Their personal reputation is also entwined with the business. In this case, the business is valued and a share is given to the other spouse. The business remains with the spouse managing the business.
Partnership is classified into two categories – spouses in partnership and partnerships with third parties.
Spouses in Partnership
It is deemed to be a personal exertion kind of business where one spouse typically retains ownership after separation. If both spouses have contributed to the business and then separate, this can impact the business continuity in future.
Partnerships with Third Parties
In this situation, the separation will have an impact on the other business partners and they may not welcome the financial disclosure of their partnership. The court will give consideration to the partnership agreement and its stipulations on how to proceed in case of separation, divorce of any partner. It will also consider the impact of separation on the partnership and the rights of the third parties involved.
In case the spouses were the managing partners of the business, then this will be treated in the same manner as Spouses in Partnership.
If the company has third party shareholders, then the business will need to be valued to determine its value and necessary disclosure will be required.
The company structure also has a bearing on the legal implications. Whether the spouse has a simple majority or a special majority also has to be reviewed and will be considered. Minor and major shareholding will have its own impact on the valuation of the business.
How is a Business Valued?
Two approaches to evaluate a business exist.
One approach evaluates the value of a business today and is also known as Liquidation Value. It is calculated by totalling its assets and subtracting its total liabilities.
The second approach evaluates a business’ capability to earn future income or what a typical buyer would pay to purchase that business. It is also known as ‘Going Concern Value’. It is calculated by finding the net value of the business by subtracting liabilities from assets and considering other factors such as business’ outlook, earning capacity, goodwill and value of similar companies.
Assigning A Fair and Reasonable Value to The Business
Courts prefer to choose a fair and equitable value for the business given the specific circumstances of the case. Each spouse needs to support their valuation viewpoint with supporting evidence and documentation. It is important to note that irrespective of the method of valuation, multiple interpretations are possible.
How We Can Help
At Nanda & Associate Lawyers, our capable family law lawyers help in making effective representation for property disputes and business valuations. They understand your specific circumstances and provide tailored and customized solutions for each of them. Many legal complexities exist in evaluating impact of a divorce on business, and an experienced family law lawyer can help you to navigate better in those complex situations.
Our Mississauga Family Law Lawyers are available for a consultation. Come and experience our quality legal counsel and personalized care we give to each client.