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What happens to the family business when spouses divorce?

This article looks at what can happen to a family business during a divorce if there is no marriage contract.

Divorce is hard for any couple, but it is especially difficult when the spouses getting divorced are also business partners. There are thousands of small businesses across Canada that are owned or operated by spouses and most of those businesses, according to the Globe and Mail, have no partnership or other agreement in place governing what happens to business assets when the owners divorce. The fact of the matter is that small businesses are not immune to the fallout of a divorce and business assets could be subject to division if the owners' marriage breaks down. Below is a look at what options business owners have for dealing with a divorce.

Dividing the family business

If both spouses run and operate the family business, then the value of that business will most likely be subject to division during a divorce. However, even if only one spouse owns the business, the other spouse can claim that a share of the business' value belongs to him and her due to indirect contributions. For example, one spouse may have decided to become a stay-at-home parent in order to allow the other spouse to build the family business, thus sacrificing his or her career prospects for the sake of the other spouse's business. In that situation, the non-owning spouse would likely be remunerated for his or her contribution to the family business.

Preparation is key

Preparation is the best way to protect a business from the detrimental effects of a divorce. As Advisor.ca points out, there are a number of agreements, such as partnership agreements and shareholder agreements, that can stipulate what share of the business belongs to each spouse. A marriage contract can also clarify what happens to the business if the owners divorce or if one spouse passes away.

When no agreement is in place

Unfortunately, many spouses, including those who are in business together, have no agreement in place governing who gets what share of the business. When this happens it is often in each party's best interests to negotiate a settlement. In many cases, one spouse will buy out the other spouse's share in the business, thus allowing the business to continue. However, buying out the other spouse may prove too expensive, in which case the business may have to be sold and the proceeds split between the two parties.

Selling the business is anything but straightforward. Disagreements often arise concerning the value of the business, for example, which can make selling it particularly difficult. As with any divorce, emotions are also running high, which can lead to poor business decisions being made.

Getting legal help

Fortunately, a lawyer can help business owners who are going through a divorce understand what decisions are in their long-term best interests. An experienced lawyer can provide a voice of reason during what is often a contentious process, thus helping to provide stability and reassurance for any business owner going through a divorce.

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