What happens to a limited company during a divorce? When a business is set up as a limited company, it operates as a separate entity. This differs from a sole trader business, where the individual is personally responsible for the assets.
If you are the director of a limited company and are facing a divorce, the business will likely be included in the financial settlement. So, what happens to a limited company during a divorce?
A limited company as a matrimonial asset
Shareholding in a limited company is generally considered a matrimonial asset, regardless of whether the business was established before or during the marriage. The company’s assets and profits may be included in the pool of assets available for negotiation in a divorce settlement.
In some instances, a shareholder agreement may include terms that address divorce and provide guidance on how to proceed. A crucial aspect of dealing with a limited company in divorce proceedings is the valuation of the business. But how is this valuation determined?
Business valuation in divorce
A reliable and accurate business valuation is crucial for protecting the interests of both parties involved. In divorce cases, a limited company may be valued using various methods, depending on different factors.
Factors such as the recent sale prices of similar businesses and the value of business assets may be considered. Additional valuation methods could include the price-to-earnings ratio (P/E) and the cost of entry into the business.
After the company has been valued
Once the company has been valued, it will be included in the overall pool of assets in preparation for the settlement. There are several factors to consider regarding what might happen to a limited company during a divorce. Here are a few potential outcomes:
One spouse buys out the other
If both parties own shares in the business, the sale of shares from one party to another can be negotiated. This arrangement allows one party to continue managing the business and maintain continuity in its operations.
Voluntary liquidation
A process known as Members’ Voluntary Liquidation (MVL) allows a company to close efficiently, distributing profits to directors based on their shareholding.
A business sale
The two parties can agree to sell their business outright to a third party and divide the proceeds based on the negotiated settlement. This approach allows them to start anew and helps avoid potential future conflicts if they remain involved in the business together.
Compensation payment
One spouse may become the company’s sole director and provide a maintenance payment to their partner for financial compensation.
Complexity of limited company divorce settlements
Divorce negotiations and settlements involving a limited company can be complex. Any existing animosity between the couple can complicate matters further or even lead to a stalemate, mainly if one spouse establishes and operates the company throughout the marriage.
Like pensions and other marital assets, a limited company is considered during divorce settlements and can sometimes continue to provide income for both spouses.
When a limited company is involved in a divorce, each partner must seek independent specialist legal advice. This can help alleviate a highly emotional situation in which both parties aim to protect their financial interests.
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