Business owners use many strategies to protect their business interests: but if you don’t consider your personal relationships, you may be leaving yourself vulnerable without knowing it.
Business assets are included as part of the matrimonial or de facto property pool to be considered when dividing assets following separation. Business debts and liabilities are also counted as part of the property pool.
This is the case whether the relationship is a marriage or de facto partnership.
As specialist family lawyer and mediator, Anna Carthew of Ballarat Legal Resolution Services explains, if you are going through a separation:
“It is likely that the other party will demand to see all of your business activity statements for the business, income tax returns for the business, profit and loss statements for the business and the list goes on… All of this information will have to be disclosed under your obligations of disclosure under the Family Law Rules. This may be a very intrusive process and if you are in business with third parties it can be very disruptive and damaging to your business relationships with the other third parties, such as other shareholders, who may not be overly thrilled about sharing all of their financial information with your former spouse or former domestic partner.”
But there are few tools you can use to protect your business from any fallout in your personal life. The most important tool is a binding financial agreement.
A financial agreement is a little-known contract in Australia that allows a couple to set out how they want the business assets and liabilities to be dealt with in the event that their relationship comes to an end.
This type of agreement can be used at any stage of a married or de facto relationship – before (you are probably familiar with a prenup), during or after. The laws apply equally to heterosexual or same-sex couples.
There are a few common scenarios where you might want to use a financial agreement to shore up your business finances. For example, you may wish to:
- Quarantine your business assets from the property pool. This can be quite common for older couples entering into a new relationship where one or both parties have built up sizeable business assets;
- Protect your partner or children from business debt;
- Quarantine superannuation;
- Protect your interests in businesses, companies, trusts and keep them separate from personal assets such as residences, cars, savings, and the like;
- Transfer business assets to your partner. Note, this cannot be done with the intention of hiding assets from business creditors.
Importantly, a financial agreement gives you the opportunity to quarantine your business interests should your relationship end. If your business represents your main income source, dividing or selling it in the event of property breakdown can be avoided with a binding financial agreement.
Likewise, you can eliminate the possibility of receiving a lower share of the marital property pool if your business has a high valuation on paper but in reality operates as a vehicle for you to exchange your time for income.
A financial agreement offers certainty about how you will divide or retain your business interests if the relationship breaks down instead of leaving it to chance.
Anna reminds us that:
“The best time to consider drafting a financial agreement is before you commence your business structure or as soon as possible whilst your business is operating and able to pay its debts as and when they fall due.”
For more detailed discussion on how to protect your business from emotional waves in your personal life, click here.
To learn more about financial agreements, click here.
