Divorces are notoriously messy situations to go through. Sadly, adding a business into the mix only makes things more complicated.
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?
No, a limited company isn’t protected from divorce proceedings. Because owning a limited company is classed as a financial asset (i.e. something you own) and thus a part of your divorce proceedings. No matter what the involvement of your spouse is, all assets have to be divided in a divorce.
But before you panic, this doesn’t mean you need to shut down your company to divide the assets. In most cases, agreements are made to provide a certain value of your company before you take sole financial ownership.
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What happens to a limited company during the divorce process?
As a limited company counts as a financial asset, it must be divided between you and your spouse during a divorce. The way that it’s divided will depend on a range of factors, including:
- The size of your company
- The level of involvement your spouse had in the company
- How many shares your spouse might have in the company
And, of course, this will all be impacted by the details of your divorce itself – including if you are after a clean break and a 50/50 split of everything, or if you are petitioning to keep certain assets over others.
As we’ll cover in more detail below, there are four main ways of diving up a limited company. The goal is to pick a method that works for both you and your partner and try to come to an agreement. If you can’t come to an agreement either by yourselves (or through a mediator), 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.
The four ways to divide a limited company
When it comes to dividing a limited company, there are four possible outcomes:
1. Offsetting
This is where you keep the limited company and its ownership intact but instead forfeit assets from another area during the divorce. 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 the toy box.
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 option is most commonly used by those with equal ownership of the business, or those who own shares of it. If you both have a fair claim to the business, you could offer a cash settlement to buy your spouse out and gain sole ownership.
3. Spousal maintenance
Spousal maintenance is when you agree to pay your partner an ongoing maintenance amount from the company’s income. It’s almost like keeping them as salaried employees, except instead of working for your limited company, they agree to leave it alone.
This option is best for those who 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 for the family home or giving your spouse an allowance.
4. Sell the business
This is the last resort option that many business owners don’t want to consider in the event of a divorce. However, it is 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.
What is the value of my limited company?
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 undervalue your business to make the payout cheaper, just be aware that your ex-spouse can counterclaim years down the line for misinformation. It’s never worth the risk to lie about your company’s value.
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 don’t believe your limited company’s valuation is accurate, they can apply to the court to seek further information and a resolution.
Can you use pre-nuptial agreements to protect your limited company?
A prenuptial agreement, also known as an antenuptial agreement or premarital agreement, is a written contract that a couple signs before they get married. It’s used as a way to define and protect certain financial rights and obligations if you get divorced down the line. For example, Beyoncé and Jay-Z have a prenup that would, in the event of a divorce, give Beyoncé $1 million for every year they were married, plus an extra $5 million for each child they have together.
You don’t need to be a mega-rich celebrity to have a prenuptial agreement. If you’re worried about your limited company, it is possible to have a prenuptial agreement drafted that will help you, in the event of a divorce, ensure that your limited company remains under your sole ownership.
We must point out that prenuptials 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.
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What happens if you start a limited company after separating?
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 were separated at the time of the company’s creation. Generally speaking, the less your spouse has to do with the company, the more chance you have of protecting the company during the divorce.
However, every divorce is unique, and no outcome can be guaranteed. That’s why we always recommend speaking to legal professionals who can examine your exact situation and provide tailored advice on how best to protect your company.
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What’s yours is mine: divorcing with a limited company
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 has 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, it 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 scenario, selling your limited company.
Although you are not obligated to seek legal advice, we recommend that you always discuss your options with a legal professional before you reach 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 you might face. If things escalate to court, they’ll fight in your corner.
For other help, news and advice on how to growth your business, make sure you keep up to date with Business4Beginners.
