When a couple get divorced, one of the biggest issues which arises is how their property will be divided between them. If you have a small business this could be a concerning time for you. Whether you are single, in a relationship or married, if you own a small business, it would be wise to consider “divorce-proofing” it as soon as possible to minimise the risk a divorce could pose.

 

In the event of a divorce

Generally, where a marriage, civil union or de facto relationship has lasted more than 3 years, all relationship property will be divided equally between the parties unless the Family Court considers there are extraordinary circumstances which would make equal sharing repugnant (unacceptable) to justice.

The parties can come to an agreement between themselves, however, if they are unable to agree, then settlement will be attempted through their lawyers. Almost all cases are settled through negotiation and mediation, as the normal rule of a 50/50 split, usually encourages settlement. Only around 1% of cases will progress to a Family Court hearing.

There is a distinction to be aware of between “relationship property” and “separate property”. This is important because the rules for property division only apply to relationship property. Relationship property will include things such as the family home, family chattels and if you are not careful, your business.

 

5 Tips for divorce-proofing your business:

  1. Keep business matters separate from family matters

Even if you own your business prior to getting married, if you allow it to be intermingled with your relationship property, it can also be considered relationship property. This would put your business at risk of being divided equally between you and your partner if you divorce. Avoid doing anything which might blur the line between what is your separate property, and what is relationship property belonging to both of you.

If possible, avoid hiring your husband/wife to work for you, this may increase their ability to claim they are entitled to a share of the business upon divorce.

 

  1. Pay yourself a reasonable wage

It is important you pay yourself a reasonable wage from the business which you can then invest into your family life.

This reduces the risk of your ex claiming he/she did not receive a reasonable portion of business income while you were married and that therefore he/she should receive more now, in the form of compensation.

Avoid putting all income back into the business and remember to utilise some of that for the benefit of your family.

 

  1. Enter into a contracting-out agreement (aka – ‘pre-nuptial’ agreement)

If you do not want the 50/50 division rule to apply to your relationship, you can enter into an agreement to ‘contract out’ of the Act.

This agreement will set out how you will own the property and how it will be divided if your relationship breaks down. For example, it might specify that your business will always be separate property and will not be divided in the event of a divorce

Specific requirements must be met for an agreement to be valid:

  • The agreement must be in writing
  • Each party must receive independent legal advice (i.e. you cannot use the same lawyer)
  • Each party must sign the agreement and their signature must be witnessed by a lawyer.

Note however that the court has the ability to overturn the agreement if it would result in a “serious injustice” so do not risk creating an agreement which is vastly unfair to one or other of the parties.

For more information on this, see the article ‘Property Division’ on this website.

 

  1. Create a family trust

Advantages

As mentioned, when spouses split relationship property will usually be split 50:50. However, the modern trust frequently undermines this.

If your business is transferred to a Family Trust, it is no longer relationship property because it is not owned by you, but by the trust.

You may allocate yourself, and/or your children as beneficiaries of the trust (those who stand to benefit).

Disadvantages

Costs:

Initial start-up costs may range anywhere from $480 to $3,000 depending on the complexity of the trust, which would include the process of transferring property and administration.

There are also likely to be overheads in maintaining a trust, particularly if it contains income earning assets as tax returns will need to be filed and annual accounts kept.

Often, to counteract the risk of a trust being labelled a sham, professional trustees may be appointed to ensure it is run properly who will charge fees for their professional services.

Risk of a trust being attacked as a sham:

For a trust to be considered a “sham” it must have been so from the beginning (i.e. established for an invalid purpose). Administrative errors will not result in the trust being attacked as a sham. However, this will probably create extra costs.

The court is able to set aside a disposition (placing of property into a trust) which was intended to defeat the rights of a spouse or partner. It is not possible to place matrimonial property in trust for the sole purpose of removing it from the relationship property pool.

If a trust is declared a sham, the settlor will find the property does not belong to the trust but is still theirs, defeating all the benefits he/she hoped to gain by creating it in the first place.

Loss of control and ownership of assets in trusts:

Once assets are transferred to a trust, the settlor no longer personally owns or controls them. The ability to manage the assets passes to the trustees who do so in the best interests of the beneficiaries. Thus, depending on how the trust is set up, the settlor may lose considerable control.

 

  1. Create a buy-sell agreement

If your business is owned by yourself and at least one other, it would be wise to enter into a buy-sell agreement which will dictate what happens when the circumstances of one of the owner’s changes.

This might include where one person dies, retires, wants to sell his/her share or gets a divorce.

These agreements provide a degree of certainty to an otherwise uncertain situation by setting out exactly how and on what terms, interests in the business will be dealt with.

One of the things a buy-sell agreement might require, is for each owner to have a satisfactory contracting out agreement with their spouse.

 

It is wise to make sure your business will be protected if you separate from your partner. Seek legal advice from a lawyer experienced in this area so you have peace of mind as your relationship moves forward.

 

The information posted on this website is prepared for a general audience, without investigation into the facts of any particular case. This information is no substitute for legal advice and does not create a lawyer-client relationship; you are advised to consult with a lawyer on any legal issue.”