When a business is structured as a limited company, it’s a legal entity in its own right and any assets are owned by the company itself. This contrasts with a sole trader business where the assets are owned by the individual.
If you’re the director of a limited company and are considering divorce, the business will probably become part of the financial settlement between you and your spouse. So what happens to a limited company in a divorce situation?
A limited company as a matrimonial asset
Limited company shareholding is likely to be regarded as a matrimonial asset regardless of whether the business was formed before or during the marriage. The company’s assets and business profits may also be added to the ‘pool’ of assets available for negotiation and inclusion in a divorce settlement.
In some cases, a shareholder agreement may contain terms relating to divorce, and provide a guide as to how to proceed. A key element when a limited company features in a divorce, however, is the business’ valuation but how is such a valuation arrived at?
Business valuation in divorce
A reliable and accurate business valuation is essential to protect the interests of both parties. In divorce cases, a limited company may be valued in one of several ways depending on its share structure, whether one spouse is the sole director, or if they have a controlling interest in the business.
The recent sale price of other similar businesses may be taken into account, along with the value of business assets, with other potential valuation methods including the price-to-earnings ratio (P/E) and entry cost.
After the company has been valued
Once the company has been valued it will be added to the general pool of assets in readiness for a settlement. So what might happen to a limited company in divorce? Multiple factors need to be taken into account in this situation and every case is different, but these are just a few potential outcomes:
One spouse buys out the other
If both parties own shares in the business, a sale of shares from one to the other may be negotiable so that one continues to run the company and there’s a degree of continuation in business affairs.
Voluntary liquidation
A statutory process called Members’ Voluntary Liquidation (MVL) enables the company to close down tax-efficiently with profits being distributed to the directors per their shareholding.
A business sale
The two parties may agree to sell their business outright to a third party and divide the proceeds according to the settlement negotiated. This would allow them to start afresh and avoid the potential for conflict in the future if they both remained in the business.
Compensation payment
One spouse might become the sole director of the company and make a maintenance payment to their spouse so that they’re financially compensated.
Complexity of limited company divorce settlements
Limited company divorce negotiations and settlements are typically very complex. Any animosity between the divorcing couple can create further complications or a stalemate, especially if only one spouse set up the company and ran it throughout the marriage.
As with pensions and other matrimonial assets, however, a limited company is taken into account in a divorce settlement and can sometimes continue to provide an income for both spouses.
It’s paramount for each partner to obtain specialist independent legal advice when a limited company is involved in their divorce. This can ease a highly emotive situation where both parties want to protect their financial position.
About the author – Chris Bristow is a business debt expert at Real Business Rescue, company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.
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