What you need to know about divorcing your business partner

11 Jan 2019 By Karen Holden

With January commonly known as ‘divorce month’, Karen Holden outlines what you should bear in mind if ending a marriage that includes a business

When setting up a business with your significant other, a divorce is one thing that you often do not anticipate, plan for or want to be a party to. Separating from your partner is a tough thing to do, but throw in a business and things get far more complicated. So how should you tackle it?

Decide who owns the IP

When divorcing your business partner, you need to know who owns the intellectual property (IP). Did you transfer this to the business correctly or is this owned by one or both of you?

IP can be the business’s main and most valuable asset – and could be held to ransom. Without an agreement in place, a costly dispute could arise. IP that is owned jointly could be more difficult, as one person will need to be bought out. Who will keep the business and what should the IP price be? 

Protect the business

If you do decide to press ahead and protect your business then you will need a Founders’ Agreement. This should at the very least cover:

  • The transfer of all IP to the company
  • What happens in the event of a dissolution or dispute
  • Restrictive covenants to stop the departing spouse stealing clients, setting up in direct competition or sharing confidential information
  • Who owns what shares and clarification of the monies put in by each of you (make sure that your wills mirror this too)

The equal split

The starting point in family proceedings, if you have no legal documentation, is that the joint assets go into a pool and until you prove otherwise, there will be a 50/50 division. 

If a business decision is required and you are 50/50 owners (by law or in default), but cannot agree, the company could end up being wound up. It is common for one partner, who plays no real role in the business, to use joint ownership to negotiate more in a divorce.

Document cash flow

Often partners don't document loans given to the business – they just put in cash as needed because it is a family business. However, this makes for an accounting mess and you could lose your invested money if everything just goes into one ‘pot’, and/or you cannot formally separate those funds.

What if one spouse has not taken a salary or dividend but the other has? Without an agreement permitting this, the other party could now lawfully be entitled to similar payments, causing a headache around cash flow and tax.

You might want to sell the business, as there is no cash to fund a dissolution or buy out the other, but you will need the others party's consent, in which case you need to agree how – and how much – to repay each other. A dispute would put buyers off so you would need to work out a solution between you first.

If assets cannot be sold, an agreement reached, or one of you cannot afford to buy the other out, the court will be forced to choose a side, or worse – wind up the company, losing you everything you put in.

Any business should start off right and get their house in order with clear legal documents. This protects the business and the founders and, if a dispute or divorce does come out of the blue, it’s not so difficult to unravel and fairly separate out the business’s interests.

Karen Holden is the founder of A City Law Firm

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