Limited Companies and Divorce

Divorces are messy situations that require a significant amount of time, financial expense, and energy. When business matters get mixed into it, things only become more complicated. In this helpful article, we’ll look at limited companies and divorce.

Is a limited company protected from divorce?

No – a limited company is not protected from divorce. Businesses are a part of the assets that need to be distributed on divorce, including all the shares held in limited companies. These processes are the central focus of financial proceedings wherever a divorce occurs.

Whether you own the company or are a shareholder, divorce significantly affects limited companies. Of course, it’s hard work from your lawyer’s side, too; fairly dividing financial assets is no less than a headache. Learn more about divorce and dividing assets from our legal experts.

If you’re the owner of a limited company, you might also be worrying about the future of your business. So let’s dig deeper into the consequences of a divorce on a limited company and how you can protect it from this ugly situation.

Is a company included in the marital property?

If one party owns a company, regardless of the other party’s amount of input, the business is considered marital property in England. 

This means in case of a divorce, the courts in England, Wales, and Northern Ireland see business interests as marital assets. Thus, their value must be discussed as a part of financial proceedings.

However, this situation is a bit different in Scotland. The country’s courts only count business matters as marital assets if the company was acquired or founded after the marriage. 

Simply put, if one party were running a successful business in their bachelor days, they’d keep the assets to themselves only. But things aren’t as easy as they sound. If the business value significantly increases during the marriage, this revenue boost will be considered and added to the financial discussions.

Is a limited company protected in divorce?

When it comes to divorces, limited companies are treated the same way as other businesses, such as LLPs, partnerships, or sole trader companies. The court can ask the business shares to be distributed among both parties or even order to sell the entire company.

The divorcing party can only claim their spouse’s shares in a limited company. This means they can’t claim the shares of any other shareholders or company directors.

Our legal specialists share their expertise on how to protect finances in a divorce.

Can a person claim their former spouse’s business assets?

Yes, a person can claim their former spouse’s business assets. Claiming on your ex-spouse’s business assets is possible even after years of getting divorced. This can even include newly-acquired business assets. 

To prevent this situation from happening at any point in your life, a limited company owner needs to obtain a financial settlement with a clean break order. This refers to a financial settlement with a legal order that prevents the chances of any future claims being made on the other party’s assets.

What happens to a limited company in a divorce?

If the company solely belongs to one party, i.e. they established and ran it single-handedly, the court ensures that they retain the full authority of their business. 

However, this party will have to give alternative assets (a part of their assets) as a substitute for the company’s value. This could be a portion of the home where they lived, a car, or anything that equals the value of their business assets. We will discuss this in detail in the next section. 

If there are inadequate assets to give off as ‘alternative assets’, the party may have to transfer shares of the limited company to their spouse. The court is less likely to ask any party to sell their company; however, it has the right to do so.

This situation becomes even more complicated in the case of a family business. Such companies usually have equal numbers of shares distributed between both spouses. So, the nature of divorce plays a significant role here.

If the couple wants, they can continue working as company directors even after the divorce. However, if that’s not the case, one partner can become a “sleeping director” and let the other manage the business matters.

There are several other options to settle this matter. If both parties can’t reach a middle ground and selling the business isn’t an option, they have to ask for legal help from a court and agree to whatever decision it makes. 

The principles that apply to a limited company also apply to partnerships. However, irrespective of what approach you take to settle this matter, you’ll need help from a solicitor even before the start of the court proceedings. 

A good family solicitor will offer guidance about  the complexity and legal technicalities related to the distribution of limited company assets in a divorce. 

A solicitor also draws up your consent order, a legal document showing the judges how you want to divide your business assets in this divorce settlement. 

Contact our expert family lawyers today to see how we can help you.

Agreement to divide a limited company

If you want to avoid the exhausting court proceedings, the first step is to bring your partner on the same page as you. This means convincing them to agree on dividing the assets and whether you need a mediator. 

During the agreement phase, you can suggest different ways of splitting the assets of your limited company. If the other party finds any suggestion fair, they are more likely to agree to it instead of going to court.

You can put multiple options in front of your spouse, such as buyout, alternative assets, and spouse maintenance. These methods include offering another asset with equal value, buying the shares, or paying the other party an ongoing maintenance amount from the business’s revenue.

If things don’t turn out well between you and your partner, you are left with no option but to knock on the court’s gate. The judge then goes through all the details of your limited company, including its established date, your partner’s input, shares distribution, etc.

After that, they give an independent decision that both parties are obliged to follow.

If you’re settling everything on your own, know that some of the options may impact your tax or have hidden additional fees. So, it’s better to consult a good solicitor or a lawyer to understand these things and then agree on any option.

How are limited company assets divided in a divorce? 

Limited company assets are divided based on different factors. There are no standard laws or ways that treat the assets of a limited company equally. Some of these factors include the company size, the degree of involvement of your spouse, and the number of shares your partner may have in the company.

The most common ways the assets of a limited company are divided include:

Offsetting/alternative assets

If you’re the owner of a limited company, offsetting or giving off alternative assets is the best way to retain your ownership. In this settlement, you can forfeit assets from any other place that equals the business assets’ value.

For instance, instead of giving the shares of your limited company to your ex-spouse, you can let them keep the marital home. The rule of thumb is to break down valuable assets of your home according to each party’s preference. If someone wants to keep the business’s total assets, they would have to give up their other assets of the same value.

This way, both parties are financially backed up, and the limited company is already standing there. Offsetting protects your business assets from being distributed but still fulfils your partner’s right to have a fair part of assets.

Cash settlement 

If no party is ready to give up their share in the limited company, buying out the other from the business is preferred. This is more common for those businesses having equal ownership of both parties. 

In case both you and your partner are willing to keep the company, one of you can go for a cash settlement and buy the other party’s interest. This way, you’ll have the sole ownership of the company, and your ex-spouse can’t claim it at any point.

Spousal maintenance 

Spousal maintenance is the amount of money you agree to pay your spouse from the revenue your limited company generates. The spousal maintenance is an ongoing amount, so you can consider your partner a salaried employee. But, of course, they won’t be working for your company and will be far away from it.

This method is ideal for people who have used the company’s revenue to pay for the lifestyle of both themselves and their spouse. It includes paying the marital home, offering your spouse allowance amount and so on.

Selling the business

If nothing works out between both parties, selling the business is the last resort left. However, most business owners don’t consider this option in divorce settlements. 

If you can’t figure out how to divide your limited company’s assets in the ugly divorce procedure, there is no option but to sell the company and divide the money. 

No matter how hard you try to avoid it, it’s still a good option if you think you can’t recover from a buyout or manage the spousal maintenance for a long time. Instead of spending time rebuilding the company, it would be a better step to sell it and invest the money in establishing something new with your sole ownership.

How is a company’s value determined?

A company’s value is usually determined before initiating a divorce procedure or settlement. The resulting value of the business indicated the amount of money that should be added to the overall financial proceedings or matrimonial pot.

The owner proposes the company’s estimated value in the Form E, containing the company accounts and an authentic letter from the accountant. The business valuation considers the following elements:

• Total assets, including business property, cash reserves, shares, and stock
• Annual turnover rate and past profits 
• Estimated profits based on new business agreements
• Company’s total debts

If the other party doesn’t accept the valuations proposed by the business owner, an independent accountant has to jump into the scene. This professional is then asked to re-evaluate the factors and give an accurate business value.

What can you do to protect your limited company in a divorce?

Now that you know the answer to your question, “Is a limited company protected from a divorce?” is no, you can move on to think about the possible steps to protect your company in a divorce. Here are some ways that you can follow to try to protect your business:

Prenuptial agreement

You can go for a prenuptial agreement if you are not yet married, but they are not considered legally binding in the court. However, the courts have been giving more importance to them during the previous five years, given that the guidelines from the higher court cases are followed.

In such agreements, you can exclude your limited company from the list of things your spouse can claim. If the guidelines of the higher court cases are implemented, you can protect your business.

Postnuptial agreement

If you’re married, you can opt for a postnuptial agreement with your partner’s consent. Such agreements protect the businesses from being a part of the assets your spouse can claim.

Retain the sole ownership

The best way to protect your limited company in a divorce is not appointing your spouse as a partner or a director or giving them any business shares. This way, they neither have any input in your company nor can claim it.

Keep the marital home away from the company

Never secure your marital home against the business’s debts. Doing so increases the chances of your spouse claiming your business.

Seeking professional help

Despite owning and managing your limited company, you can’t protect its assets from transferring to your partner in a divorce. In addition, many complexities and legal technicalities arise when distributing a limited company’s assets. 

Therefore, it’s essential to take help from a professional solicitor to avoid any potential claims from your partner against your limited company. 

To get started, get in touch with Austin Kemp for expert legal advice. For more information call our divorce solicitors on 0845 862 5001 or email mail@austinkemp.co.uk.

Contact our expert divorce solicitors for advice

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