How to Protect Your Business in a Divorce: Key Steps for Entrepreneurs in BC
By Chris Cosentino, Family Lawyer, Vancouver
Divorce can be a difficult and emotional time, and if you own a business, it can also bring complicated financial challenges. In British Columbia (BC), just like in many other places, business owners face unique issues in divorce. This is especially true if you have a family-owned business or if your company’s assets are intertwined with your personal finances.
As an entrepreneur, you’ve worked hard to build your business. The last thing you want is to see it divided or devalued. In this blog, we’ll walk you through key strategies for safeguarding your business assets in BC.
How Are Business Assets Divided in a Divorce
There are two pieces of legislation that govern divorce proceedings in BC:
- The BC Family Law Act (FLA) – This is provincial legislation that applies to both married and unmarried spouses in family law matters.
- The Divorce Act – This is federal legislation that applies to married spouses across Canada.
When it comes to dividing property and assets in BC – including business interests – it is only the FLA that applies.
The FLA deals with property division by first determining everything that constitutes “family property” and then dividing that family property between the parties. Family property is usually divided evenly, though in some cases, an unequal distribution of property may be ordered.
Generally, “family property” includes any asset or beneficial interest a spouse acquires during the relationship. It excludes assets or beneficial interests acquired before the relationship began, though any increase in value of a pre-relationship asset during the relationship is also considered family property.
In the business context, if you started a business before your marriage but it grew substantially during your marriage, your spouse may be entitled to a portion of that increase in value. This could mean giving your spouse a share of the business or compensating them with other assets, such as property or cash. To reduce the odds of this happening, you can take proactive steps before or during your marriage to safeguard your business interests.
Why Prenuptial Agreements Are a Good Idea
One of the most effective ways to protect your business in the event of a divorce is by creating a marriage agreement, commonly known as a “prenup.” A prenup is a legal document that outlines how assets – including your business – will be divided if the marriage ends. This is especially important if you’re an entrepreneur who has built your business before getting married.
A cohabitation agreement serves a similar purpose but applies to common law partners who live together but are not married.
A prenup can include provisions stating your business will remain separate property, regardless of any increase in value during the marriage. This can be a game-changer in ensuring that your hard-earned business is protected from any claim by your spouse. However, business owners should be aware that prenuptial agreements are not bulletproof and can be challenged after the fact. To reduce this risk, exchanging full financial disclosure and ensuring both parties receive independent legal advice can help prevent a prenup from being successfully challenged.
If you’re already married and want to protect your business, you can still create a postnuptial agreement. Similar to a prenup, a postnuptial agreement is made after marriage and can clarify how your business will be treated in the event of a divorce.
Maintain Clear Financial Records
Keeping detailed and accurate financial records is very important for protecting your business in a divorce. This includes not only day-to-day transactions but also tracking your business’ value over time. The more information you have about your business’ growth and any changes in value, the easier it will be to demonstrate what portion of the business belongs to you personally and what may be considered a family asset.
Having an accountant or financial advisor who can help track your business’s financial health and value can be very helpful in a divorce. A business valuation expert may be necessary to provide an independent assessment of your company’s worth, which can play a significant role in how assets are divided.
Consider Using Trusts to Protect Business Interests
Another option for protecting your business is placing business assets in a trust. A trust is a legal arrangement where assets, such as shares in your business, are placed under the control of a trustee. The trust specifies how the assets are managed and who benefits from them. By placing business interests in a trust, you may be able to shield your business stake from division in a divorce – provided you are not a beneficiary of said trust.
A trust can also offer other benefits, such as tax advantages and protection from creditors. However, setting up a trust is complex, so it is a good idea to get legal and financial advice before pursuing this option.
Be Mindful of Your Separation Date
In BC, the date of separation is crucial in determining what assets are divided. It marks the point when the court assesses your assets to decide how they should be split. If your business grows significantly between the date of separation and the divorce, that increase in value could be considered a family asset.
For business owners, it’s important to keep accurate records of what your business was worth at the time of separation, as well as any changes after that. If you believe that your spouse might try to claim part of the increase in value of your business after separation, having a clear timeline and evidence of the business’ financial state over time can help protect your interests.
Because separation dates have such strong implications in property division cases, the date can be hotly contested between parties. Keeping clear records of correspondence with your ex around the time of separation can help establish the date and prevent a claim to a much later separation date that would bring more value growth into scope of family property. This becomes especially important when parties separate but continue to live under the same roof.
Consult with an Experienced Family Law Lawyer
Divorce involving a business can be very complicated. Whether you own a small business or a large corporation, dividing assets and determining what’s fair can be challenging. By being proactive and taking the right precautions, you can minimize the impact of divorce on your business and stay focus on what matters most—its future.
To protect your business interests, it is essential to consult with an experienced family law lawyer in BC – ideally, one who understands the complexities of business ownership and divorce who can provide tailored advice based on your unique situation.
Your lawyer can help you understand how the Family Law Act applies to your case, negotiate terms in a prenuptial or postnuptial agreement, and assist you in protecting your business during the divorce process. With their guidance, you can take steps to shield your business as much as possible from being divided or sold in a divorce.
Don’t wait until it’s too late. The experienced lawyers at Crossroads Law are here to help. Book a free 20-minute consultation today, and let us assist you in protecting your hard-earned business and securing its future.
