Divorces are notoriously messy situations to go through and adding a business into the mix only makes things worse.
Even if you turn all emotions off and have the cleanest break in the world, correctly dividing your financial assets is a minefield. If one of you owns a limited company, regardless of how much input your spouse has had, then you might also be worried about how your business will survive this ugly financial war.
It comes down to this core question: is a limited company protected from divorce?
The answer to this, much like the subject itself, is a messy one to answer. In this guide, we’ll tell you everything you need to know about limited companies and divorce to help you protect your business in the long run.
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Is a limited company protected from divorce?
So first things first, let’s answer the overall question is a limited company protected from divorce?
The general answer to this is no. A limited company is part of your financial assets, so it has to be considered inside of your divorce. Even if you owned the company before you got married, the income it has generated to maintain and provide a standard of living for you and your partner will be considered in your divorce proceedings.
But before you panic, this doesn’t always mean the end to your limited company. In most cases, agreements are made to provide a certain value of your company, before you then take sole financial ownership.
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If you have a business and are going through a divorce, you’ll need a divorce lawyer experienced in the specific needs of a business too.
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How is a limited company divided in a divorce?
There’s no set way that a limited company is divided in a divorce, it depends on all sorts of factors such as the size of the company, the spouse’s involvement, and how much ownership or shares that your spouse might have over your company.
Possible ways that you could divide your limited company are:
1. Offsetting
This is where you keep the limited company and its ownership intact but instead forfeit assets from another area. For example, you could keep your limited company, its shares, and value, but choose to let your spouse keep your family home instead.
The best way to think about this option is to break it down into kids sharing toys. If someone wants to keep the big red fire engine and station to themselves without sharing, then they need to give up their legos so they both have something to play with.
Offsetting helps prevent certain assets from being divided but still gives each partner a fair and equal distribution of your shared assets.
2. Buy out
If both you and your spouse are interested in keeping the limited company, you can choose to buy the other out of the business.
This is an option that’s most commonly used by those who have had equal ownership of the business, or own shares inside of it. If you both have a fair claim to it, one of you could offer a cash settlement to buy the other out and retain sole ownership.
3. Spousal maintenance
Spousal maintenance is where you agree to pay your partner an ongoing maintenance amount from the income generated by the company. It’s almost like keeping them as a salaried employee, except instead of working for your limited company, they agree to leave it alone.
This option is best for those that have used the income or profits of the company to provide or pay for the lifestyle of you and your spouse, including things like paying the family home or giving your spouse an allowance.
4. Sell the business
This is the last resort option that a lot of business owners don’t want to consider in the event of a divorce, but is nevertheless still an option. If you can’t agree on how to divide the assets of your limited company from a divorce, you could sell the company and split the value from the sale.
Although you may not want to do this, selling your business could be a great option if you won’t be able to recover from buying out your spouse or losing a co-owner. Rather than try to keep your limited company limping along on limited resources, you could choose to sell and use the money to set up another company you’ll have full ownership of instead.
Agreeing to divide a limited company in a divorce
When it comes to divorce, the first step is to try and come to an agreement on how to split your assets between you and your partner, or through a mediator. During this phase, you’ll have the freedom to split your assets, including your limited company, however you want – as long as the solution is fair to both parties.
So, for example, you can’t keep 100% of the limited company and its value and offer your spouse nothing. You could, however, offer them a settlement or cash value to keep these rights to your company or allow them to keep a separate asset instead.
If you can’t come to an agreement during this step, then your divorce proceedings are elevated to court for an independent decision.
It’s worth noting that some of the options to divide your company will have a big impact on your tax, or come with other fees that you need to consider on top of this. Before you agree on anything, it’s always best to visit a financial adviser to get the full details and advice on the best course of option for your limited company.
Can you protect your limited company in a divorce?
If you’re already going through divorce proceedings, the best course of action to protect your company is to come to a financial agreement with your spouse or through mediation.
This step allows you to agree on how to split your assets without court involvement, and so you can keep your limited company as intact as possible – provided that you have an agreement that is fair to both parties.
However, if you’re thinking ahead on possible dark outcomes, you’ll want to consider a pre-nuptial agreement that sets out how your business will be divided or dealt with in the event of your divorce.
Just be aware that pre-nuptials aren’t legally binding, so they’re not a 100% foolproof solution. However, if your divorce goes to court, they will be heavily considered as part of your resolution, so they’re a nice backup to have.
Another way to protect your limited company is to make sure that it’s separated from your family home and spouse as much as possible. Don’t appoint your partner as a director or offer them shares, or use your family home to secure business assets.
If you’re working from your home, you may want to consider registering an alternative address for your company.
The more separated your personal life and limited company are, the less impact divorce will have on it. Just be aware that even if your spouse never worked for your business, the profits or salary that you’ve claimed are still a part of your finical assets.
Recommended – Top-Rated Online Accountant:
How do you value your limited company when getting divorced?
In order to make sure that your limited company is fairly divided, you need to get an accurate valuation of your business at the time of your divorce.
Although you might be tempted to value your business lower than what it currently is to make your payout smaller, if this comes to light the settlement could be dropped years down the line and your ex-spouse can then claim for money owed due to this misinformation.
Your limited company will be valued based on the following information:
- Your business assets, which means you should submit two years’ of accounting information if available. If your company is newly formed, you’ll have to submit your entire accounting history.
- Your business’s cash flow, with a forecast of the next 5 years of your finances.
- Analysis of comparative business models, which is often used if your business is newly formed or not enough information can be provided from the first two submissions.
When getting your business valued, we’d recommend speaking to a financial adviser to make sure that the information is correct and accurate. If you don’t already do so, we’d also recommend using accounting software to keep these records on your behalf.
If you or your spouse doesn’t believe your limited company’s valuation is accurate, they can apply to the court to seek further information and a resolution.
Is a limited company protected from divorce if we were separated?
If you’ve created a limited company when separated from your partner, you would still be liable to split the asset with your spouse when you get divorced.
In fact, unless you have a legally binding financial or clean break order, your ex-spouse could potentially claim for your limited company even if it was created years after your divorce.
However, it’s unlikely the courts would favour their side in this situation, particularly if you divorced at the time of the company’s creation. It’s always best to seek legal advice to go over your options.
Do I need to see a legal professional to protect a limited company from divorce?
Although it’s not an obligation to seek legal advice, we would recommend that you always speak through your options with a legal professional before you come to an agreement with your spouse.
They’ll be able to help you determine the best outcome for you and your company and identify any additional tax costs or fees that you might be faced with. If things get escalated to court, they’ll also be there to fight in your corner and protect your limited company.
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Is a limited company protected from divorce: A summary
When it comes to divorce, your limited company is counted as one of your financial assets so it has to be split as part of your divorce proceedings, no matter how much involvement your spouse had inside of it.
However, the less involvement that your spouse had inside your business, the easier it will be to agree on a division that allows you to keep ownership of your company, such as offsetting the value.
If you can’t reach an agreement, this will be taken to court and an independent advisor will help you reach an alternative agreement, such as buying your spouse out of the business, setting up a spousal maintenance agreement, or in the worst-case scenarios, selling your limited company.
Whatever your situation, it’s always best to get legal advice to help you find an agreement that suits you and your business.
