What happens when a business owner divorces? Part 2.

• Author: Proudman, Ken

In this second part, let's look at protecting a business, and calculating child and spousal support.

Part 1 of this article explained the various ways a divorcing spouse can be compensated for their family property claim to a business. Part 2 now looks at how to insulate a business from the negative effects of a divorce, what steps should be taken by a shareholder or their spouse when they're divorcing, and how a self-employed spouse's income is calculated for child and spousal support purposes.

How do I protect a business?

The most effective way to minimize the impact of a separation on a business is to enter into a Pre-nuptial Agreement or other domestic contract. These agreements can even be signed after the couple marries or if they have no plans to marry. They set out rules about how to divide property on the divorce or death of the spouses. A common agreement is "what's mine is mine, what's yours is yours", however there are several potential agreements. For example:

1. one spouse keeps the business, but the rest of the family property is divided normally,

2. one spouse keeps the business, and the other spouse keeps another major asset, such as the house or investments, or

3. there could be a payout amount agreed to in advance, while everyone is still on amicable terms. Sometimes it is a formula based on the length of the relationship.

Pre-nuptial and other domestic contracts can also address spousal support (alimony) in advance.

You may not want to be in business with a business partner's estranged spouse. Where there are multiple families or shareholders other than the spouses, all shareholders can sign a Unanimous Shareholders Agreement (USA). Among other terms, these agreements typically aim to prevent a spouse from owning shares directly, or from the shares being sold without the other shareholders' consent. They may also include buy-out provisions. Even if you are not worried about a divorce, USAs can be very beneficial where there are multiple shareholders and may help to avoid a future court battle. Business law lawyers can help you draft USAs.

There are other creative arrangements as well. For example, where there are multiple divisions or locations, perhaps each family owns a separate division. A joint venture agreement or licensing agreement can address their interconnectedness.

If there are multiple shareholders and another shareholder family is separating, you will want to make sure there isn't any corporate misconduct...