Going into business with your partner may be a good idea, or it could be a disaster. Family lawyer Jeremy Sutton explains how to avoid a messy business breakup.
Your life partner just may be your perfect business partner. You know them inside out and there’s a high level of trust between you, personally and professionally.
As a couple, you can structure the business the way it works for both of you. Sharing a dream and pursuing a goal can be a deeply rewarding part of your lives together.
But there are downsides. If you end up separating, your work and home life are both thrown into upheaval.
If you’ve been married or have lived together for three years or more, then the business becomes part of your relationship property.
This includes assets, as well as debt. If you separate, you’re both entitled to an equal share.
But how do you divide a business? There are three options people usually take:
1. Sell the business and split the proceeds
You might decide to sell if neither of you has the capital to run the business on your own, or you don’t want the responsibility. It takes time to sell a business, so you may have to keep working together for a while.
2. One partner buys the other out
This is what usually happens, as people don’t want to be working together after they separate. You can agree on a value for the business yourselves, or use an independent valuer.
The spouse who doesn’t end up with the business will receive a greater share of the relationship property. That person may also be paid income support by their partner until they’re back on their feet.
3. Remain joint owners of the business
This is possible, if you’re both really committed to making it work. Before deciding, talk through your expectations, from responsibilities down to the day-to-day running. Anything you can agree on up front will help to ease friction down the track.
Even if you both start with the best of intentions, goodwill towards your former partner can change over time. Work challenges can arise, and people might move on and start dating again.
If it all goes downhill, you might find yourselves back at your lawyers for a second time, settling the ownership of the business.
In fact, you could have done this when you settled the rest of your relationship property and moved on, saving time, money and stress.
What should you consider?
Going into business is a big commitment. It’s a good time to make sure your financial affairs are up to date, so you and your loved ones are protected.
If one partner contributes more money to the business upfront, and they want to get that money back at the end, they might want to have a Contracting Out Agreement (COA), or prenup, drawn up.
A COA specifies what each person would receive in a separation, rather than sharing the relationship property equally.
For example, you could specify that one partner would receive an initial cash contribution back, before the remaining assets are halved.
Or you might want a different proportion of ownership, say, 60 to 40.
For a COA to be enforced in court, both parties need to have received independent legal advice before they signed.
Update your wills
Wills should also be up to date before you go into business.
Are you the sole beneficiary of each other’s wills? If there’s another beneficiary, for example a child from a previous relationship, they might end up owning their parent’s share of the business. That could be awkward, so make sure your will reflects your wishes.
At the same time, review your insurances, to make sure you’re both protected during hard times.
Should you run a business together?
Many couples run successful businesses together. If you think it’ll suit you, go for it.
But if things are at all rocky or uncertain between you and your partner, you might be wise to keep your work and home lives separate. You need to get on like a house on fire, not a house where you’re always putting fires out.
My experience as a family lawyer has shown that often it’s better to stop working together when you split, and make a clean break.
That way, all your relationship property gets settled at one time, and you can both move forward with your new lives.
Relationship property: Relationship property is the property, or assets, that must be distributed between a couple when the relationship ends.
Contracting Out Agreement (COA) or prenuptial agreement: An agreement made by a couple concerning the ownership of their assets if the relationship fails.
First published in JunoInvesting.co.nz on 23 November 2018