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How to minimise the impact on a business when family and law collide

By July 4, 2019February 23rd, 2024No Comments

We’ve discussed some strategies before for how you can ‘divorce proof your business’, but really it should be referred to as ‘how to family law proof your business’. Since family law woes have the power to affect a business, the various risk factors of family circumstances need to be carefully taken into account by business owners well before trouble arises, with legal instruments beyond wills.

Businesses can be very vulnerable to being impacted by events in the personal lives of its owners. Apart from the complexity of negotiations with extended family members, family law proceedings can negatively impact on the running of, and the value of, a business.

Ideally, protections should be developed to address the potential risks. For example, experts point to the creation of testamentary trusts where family members don’t own assets individually but are protected by the layers of a trust. However, giving a family member sole control of their own testamentary trust (e.g. making them trustee as well as nominated beneficiary) may not offer enough protection from family law property claims, so experts suggest seeking other methods of building in protection. For instance, a number of trustees with unanimous decision-making control could be appointed, or an independent trustee, or income and capital rights could be limited.

If you and your partner co-own a business

If you share a business with your relationship partner, whether or not the business is a separate legal entity (e.g. a company), its value still forms part of your “matrimonial asset pool” and can be impacted by your divorce.

To help keep your business intact in case of divorce and not be forced to sell it off, you should think about taking steps to create a contingency plan for separation/divorce, in your company’s set-up.

Beginning with obtaining a business appraisal when you start the romantic relationship to establish appreciation during the relationship (it may not spring to mind in the first flushes of love!), entering into a Binding Financial Agreement covering the business, creating certain business structures and drafting shareholders or partnership agreements in certain ways, and maintaining accurate balance sheets to avoid later claims of intermingling.

Your business partner is getting divorced

If you have a business partnership and your business partner’s marriage is on the rocks, this can affect your business too, unless you have made contingency plans for a partner’s divorce in the company’s set-up. A well-drafted partnership, ownership or shareholder agreement can require a partner’s spouse to sell their awarded interest back to the company in the event of divorce. This so-called “buy-sell provision” should contain a comprehensive list of terms and conditions, including the method by which shares will be valued, transaction timelines, source of funds for the purchase, and so on. The partner’s spouses should provide written consent well before marital trouble arises, or you might require that business partners sign pre-nups.

You can read more tips on how to safeguard your business from a partner’s divorce on our blog here and on divorcing your business partner here.

Would you like assistance with drafting a Binding Financial Agreement or with any other family law matter? Please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Legal Services on (02) 6223 2400.

Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Legal Services.

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