The termination of the marriage is a very unpleasant process, full of both legal hassle and emotional distress. During a divorce, not only issues relating to personal relations are resolved, but also the division of jointly acquired property – the second most important point after the separation of children or the determination of their place of residence.
Today, more and more couples are found in which one spouse realizes himself in business, thereby providing a family with money. Accordingly, in the event of a divorce, there is a need for a competent and fair resolution of the issue of the division of such a business.
Article 34 of the Family Code refers to those types of property and income that act as common property for spouses. This list can be found, and an indication of the income received in the course of business, as well as shares in the capital of commercial organizations.
It is separately emphasized that the property is recognized as acquired jointly, regardless of whether the husband or wife is registered as the holder of the rights to a share in the legal entity’s capital. In any case, any property, including used for business, will be considered as standard.
The main difficulties in the division of such common property as a business consist in determining its composition, proper valuation, and most importantly, choosing such a course of further actions that will ensure its new effective functioning and will not lead to the collapse of the enterprise.
The division of business is carried out, as well as any other property, either voluntarily – by an agreement, or through a court. The requirement of the division may be stated both before the dissolution of the marriage and after it. By declaring a divorce, you can also claim the division of property, but the consideration of the case may take several months, while the separation does not take more than two months without taking into account the entry into force of the decision.
As experienced professionals from OnlineDivorce.com say, we can distinguish two situations concerning the form of doing business:
- one of the spouses has the status of an individual entrepreneur;
- business is conducted through the activities of a commercial organization, and the spouse acts as its founder, having a particular share in the company’s authorized capital or a block of shares.
At the same time, each spouse can have both equal and unequal shares in the same capital, but this does not affect the order of the section – a total assessment of the value of the shares of both spouses will be made, and then divided equally.
Consider these cases separately, determining how to proceed with the division of joint property in each of these cases.
If the spouse is an individual entrepreneur
As mentioned above, family law defines profit from business as the common property of spouses. Since a personal entrepreneur property is considered to be owned by a specific individual, any property used by the spouse for entrepreneurial activity will fall under the definition of joint ownership.
Regardless of whether the husband or wife is registered in the status of an entrepreneur, as well as from whom of them the property is used in the activity, it belongs equally to one and the other spouse and therefore is divided according to general principles.
However, business is always a risk. Therefore such an activity can be accompanied not only by making a profit but also by the occurrence of debts. The question of the division of debts is more complicated, and its solution is ambiguous.
The criteria for attributing debts to the personal or universal property are the goals of spending the funds received in the business. If the income is regularly replenished the family budget, was spent on purchases every day for the spouses, then the debts according to the provision of paragraph 3 of article 39 of the Family Code will be distributed in proportion to the delimitation of the couple’s shares in the common property. If the husband-entrepreneur spent his income solely on himself, such debts can be recognized as the economic risk of his activities, and therefore – purely personal obligations.
If the spouse is the founder
The Family Code speaks about the division of shares in commercial societies as a particular object of rights, so it would be a mistake to believe that the property belonging to the company should be divided!
Difficulties always arise when it is necessary to determine the value of a spouse’s share in a company. What should be guided in this case?
There are two ways to determine the value of shares:
The formal approach, involving the calculation of a certain percentage of the share capital. For example, the money of a company is 10,000 dollars; then, if the business is divided equally, the value of the share would be only 5,000 dollars.
But, more often than not, the real value of an organization’s assets far exceeds this figure, and property and assets managed by a company can exceed tens of millions of dollars. Therefore, this approach is practically inapplicable due to the complete inconsistency with the real state of affairs.
It should be taken into account in the process of dividing a business during a divorce. To determine it, a professional assessment is carried out, consisting in deducting the company’s debts from the sum of the total value of its property with further determining the value of the share based on a number of factors, including not only the value of the company’s property, but also the company’s profitability.
The practice has developed three main ways to resolve the issue of dividing a business upon divorce:
Section share in kind – not the most popular option. The impossibility of its implementation may be due to:
- the prohibition established in the constituent documents of the organization for the entry of a new participant in the absence of consent of other persons who also have shares in the capital, if such approval is not obtained;
- the charter, in principle, prohibits the alienation of shares belonging to the participant;
Personal relationships can hurt the business because former spouses are unlikely to become active partners.
One of the spouses may remain the full owner of the share entirely, paying the old half the appropriate amount based on the market value of the stock.
The business is sold and the cash received is divided into the required proportion. The division of the company in this way can be carried out only if there is an agreement between the spouses.
In any case, in whatever form the business activity is carried out by one or both spouses, without qualified legal assistance, the chances of correctly and efficiently dividing the business as jointly acquired property are meager.
What cannot be divided
The property that was acquired before marriage, received as a gift, in the order of inheritance or as a result of other gratuitous transactions (section 36 of the Family Code says this) is not subject to division.
Often, entrepreneurs use a gift transaction not to divide the business during a divorce. For example, make out the property on your business partner, and he already “gives” it to the real buyer – the entrepreneur. But this method is associated with additional financial expenses (transaction costs, taxes), and the transaction itself can be considered imaginary by the spouse (in the Civil Code there are relevant rules).
What you need to agree in advance
Wedding contract is concluded for a specified period before the wedding (and takes effect after the marriage), or already during the marital life.
The marriage contract concerns jointly acquired property. But spouses can immediately agree to which of them one or another of its parts will completely go away (for example, a car or a summer cottage). If that spouse on whom some property is written down becomes the owner, it is ideal for business – you don’t have to change anything when dividing.
It can be agreed that a business created in a marriage goes to one of the spouses if he undertakes to pay the other the market value of the assets or a fixed compensation.
How to divide the business, so that everyone was happy
If there is no marriage contract, the spouses can still agree on everything without a court. For this, it is necessary to decide on the division of acquired property. This document can be signed before the divorce, after or in the process of divorce. From December 2015, a property sharing agreement is subject to mandatory notarization (clause 2 of article 38 of the Family Code).
In the contract, it is necessary to explicitly state which part or which property remains entirely with each spouse. According to my experience, this document is most often at a time when the spouses are in a healthy relationship and can safely decide how to divide the property so that the business does not suffer. In some cases, the signing of such an agreement saves not only the company but also the marriage.