Entrepreneurship is on the rise and many mums find it a good way to balance the demands of work and family. But savvy mumpreneurs can hardly ignore the divorce statistics. In Australia, nearly 40% of marriages end in divorce, a statistic that may be higher when the dissolution of defacto relationships is added in.
When a relationship breaks-up, what might happen to the business that you painstakingly built?
The provisions of the Family Law Act that relate to division of marital property are gender-neutral, so that means the principles that apply to husbands will apply to wives as well. They also apply in non-marital defacto relationships.
If you do nothing to protect your business, it will likely be considered part of the “matrimonial asset pool” to be divided on divorce. This does not mean that you will lose it, but it will be considered as an element in the financial equation when assets are split.
What you can do to protect your business?
There are six important things you can do to protect your business, or at least to mitigate the harm to it in the event of divorce. Some of these may also protect your family from the financial ups-and-downs of the business, as well.
1. Enter into a binding financial agreement with your spouse long before difficulties arise. It is never a bad idea to come to a fair understanding about how to divide assets in the event of divorce. Many couples actually find that the process of negotiating a financial agreement actually provides a very healthy way to discuss family finances and plan for a happy future together.
2. Keep family assets, banking arrangements and lines of credit separate from business accounts. This will also protect your family should your business encounter financial difficulties.
3. It may be best to not involve your spouse in the running of the business. This is a place where the maxim about good fences and good neighbours can apply to family life, as well.
4. Pay yourself a salary that reflects the market value of your work. This will help counter any allegation that the business has been supported by family resources.
5. If you have partners, consider having a buy-sell agreement with them that will permit the business to buy in a partner’s interest at a pre-set price if that partner’s situation changes. This may protect your business and your family’s financial welfare in the event a business partner divorces, as well. Make sure that your partners also have binding financial agreements with their spouses and do not involve them in the business. You hardly want to be a casualty of someone else’s divorce.
6. Putting your business assets in a trust is another alternative, but it would have to occur long before any marital dispute arose. This is a somewhat technical solution that would require careful exploration with your solicitor.
Too late for that?
What if your business is pulled into the matrimonial asset pool? Don’t despair; all is not lost, but the solution may be a bit more financially painful than prevention.
Consider how you might buy out your spouse’s interest. There are a number of ways to approach this, including swapping one marital interest, your interest in the boat for example, for his interest in the business. Sometimes a buyout may involve a bank loan, selling some of the equity to a third party or a payout over time from income generated by the business. At worst, you may have to continue running the enterprise with your former spouse, but that may still be preferable to liquidating it or selling it.
Very often, a mum’s business begins as a hobby, and then becomes a hobby that produces a little extra money before it ultimately takes off. At some point in its early stages, you should begin to take yourself seriously enough to plan for success. And an important part of success is protecting what you have worked so hard to build.
Divorce is unfortunately common, a fact that no one should ignore. Whether you find yourself facing the end of your marriage, or if you just want to build a sound financial foundation for a long and happy life together, take some important steps to protect your business at the earliest opportunity.
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Owen Hodge Lawyers is holding a free Family Law seminar ‘Making your split as smooth as possible’ on 15 April where experienced family law solicitors will explore the important legal issues that need to be considered in the event of a relationship breakdown. The event is at 6pm on Wednesday 15 April at Level 3, 171 Clarence St, Sydney. Find out more here.
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