The simple answer is yes, they may be entitled to a share of the business as the value will be included in the party’s asset pool. Any interest in a business or company can be considered property and a person’s entitlement is determined based on the following family law principles.
Division of Business Assets
Regardless of if business assets are involved or not, the division of all relationship assets would still be distributed according to the property settlement test that is applied to all property matters. This is because business assets will almost always form part of the pool of assets to be divided between a separated couple.
The test can be summarised as:
- Identifying the assets and liabilities of both parties;
- Evaluating each party’s financial, non-financial and homemaker and parent contributions to the marriage/relationship;
- Considering each party’s future needs; and
- Ensuring that the property distribution is just and equitable.
Identify Assets and liabilities
Typically, if a business is involved in a family law separation it may need to be valued by an expert, considering the businesses assets and liabilities as well as future income and resources. This would then be added to the party’s property pool.
This process would be followed irrespective of if the business was structured as a partnership, sole trader, trust and/or company.
The valuation would also take into consideration any plant and property owned by the business, cost of wages and any loans attached.
This step covers a variety of different criteria and takes into account all contributions to the relationship. Irrespective of who’s name is listed on the business, if the other party assisted in any way such as completing invoicing, taking telephone calls, completing the banking or any other task, it could be classified as working in the business and helping it grow. Alternatively, if one party stayed home and did the majority of the child rearing and domestic duties while the other worked in the business, these would still be included as contributions to the relationship and an entitlement to an interest in the business.
This step is particularly crucial if both parties are working in the business and/or their income stems from the business.
When distributing the asset pool, the future earnings would need to be taken into account, considering that one party may be about to lose their income when they handover their share/interest in the business.
Just and Equitable
Lastly, the Court is unable to make an order in respect to the division of property unless it is satisfied that the order is just and equitable, taking into consideration the actual order itself and not just the underlying percentage of the split.
Business structures and how they affect a property division
Sole Trader Business
The success of a sole trader business is usually based heavily on the skills and reputation of the owner. As such, most of the time the business would be kept by the person with the necessary training, and a reasonable value would be applied in favour of that person in the property and asset pool.
If the spouses were in a business partnership, they may continue to operate the business or sell their share in the business to the other. The business would still need to be valued and the amount paid would need to be agreed upon by the parties.
Company / Trust Structure
A company and/or trust structure can be a bit trickier as it is dependent on if there are third party shareholders. If there are no external parties involved, the company will be treated much like a partnership as detailed above. If there are additional shares involved the valuation expert will consider the value of the owner’s share in the business, and not its entire value.
Navigating financial settlements when business interests are involved can be particularly stressful and difficult. It is essential to seek legal and financial advice when looking to divide these important assets as soon as possible. It is also vital to keep up-to-date and accurate records to ensure the correct values are placed on the business and ensure a smooth process.
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By Tegan Martens
Director & Principal Family Lawyer
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your particular circumstances.
Please note that family lawyers cannot provide accounting or valuation advice. However, experienced family lawyers will be able to identify business valuation issues early and will be able to provide strategic advice as to how best to address any business valuation issues.