What happens to my company now that my spouse and I are splitting up?
For tax planning purposes, many companies are structured such that the non-active spouse owns some of the company shares. Even if the company was not set up with a 50/50 share structure, the non-active spouse may be entitled to half the company’s shares through the divorce agreement as the shares will likely be considered a marital asset.
Many active owners are concerned about maintaining the integrity and consistency of operations of their company during this tumultuous time. Any non-active partners or spouses should also have this goal in mind as it will be the viability of the company that will, in the end, provide stability to all parties involved and provide an income stream.
There are a few options for owners to consider when determining how to best navigate this scenario:
- Liquidate other family assets to pay your ex-spouse out and keep the company to yourself. This may leave you and/or the company cash strapped and hinder the performance and growth of the company.
- Sell some or all of the company to a third party. It is often very difficult to find a buyer when you are trying to dispose of shares in a private company especially when faced with time pressure. As a result, you may be forced to sell the shares for less than fair market value or end up with a new partner who isn’t a good fit.
- Buying the spouse out. This may require valuing the company and obtaining financing, a costly and time consuming exercise.
- Maintaining joint ownership of the company with your ex-spouse. This may be a surprising and profitable option.
In practice, we have seen companies grow and prosper after a divorce because the previously non-active spouse now has a renewed interest in the health and the prosperity of the company, adding a new perspective, fresh ideas and new life to the operation of the company. For tax planning purposes, the expenses of the company do not often change as the management remuneration had often been paid to both spouses even though the non-active spouse had little input in the corporate decisions and management. Now, however, you may have an opportunity to put your ex-spouse to work and look forward to new opportunities for your company. Although this scenario may not work in all cases, it is important to note that if you can work amicably with an ex-spouse there may be great future success ahead for you and your company.
If you would like to discuss the impact your divorce agreement will have on your corporation, please contact us.Download a copy of this issue