What is the impact on my business if I divorce?

A divorce is stressful on many levels, particularly if you’re a business owner. Your spouse may be entitled to up to half of your business, depending on your marital contract. This can be extremely disruptive, impacting on your business operations, partners, and shareholders.  Prevention is better than cure, so safeguard your business against the possibility of divorce.

Your marital regime matters

The legal framework governing your marriage has a direct impact on how your business is affected at divorce:

• Married in community of property: If you are married in community of property your business interests are part of your joint estate. It’s irrelevant whether you’re a sole proprietor, in a partnership, or a shareholder in a private company.
  
  
• Married out of community of property with accrual: If you are married out of community of property with accrual you must document the value of your assets at the date of marriage, and on divorce, the spouse whose estate grew the least will be entitled to half the difference in value between the two estates.
  
  
• Out of community of property with no accrual: If you are married out of community of property with no accrual, you retain your own assets, business interests, and property, and this is unaffected by divorce.
  
  

Valuing a business that is part of a joint estate

If business assets need to be divided, an accurate valuation is essential. This estimates the business’s financial position and earning potential and is usually undertaken by an independent professional such as an accountant or valuation specialist. The approach will depend on the type of business. If it’s a private company, it’s easier to identify the assets and ownership compared to a sole proprietor, where business and personal assets may be intertwined.

Although the valuation process is objective, professional judgement plays a greater role if financial records are disputed or unclear.

Documents commonly reviewed during a valuation include:

• Annual financial statements
• Management accounts
• Assets and liabilities
• Tax returns
• Business forecasts and cash flow trends

In a small business, the value is frequently tied to the owner’s personal goodwill, relationships, skills, or professional reputation. This can lead to valuation disputes and reduce the value of the business if it is sold.

Dividing the business

There are several ways to do this, depending on the type of business, the spouses’ involvement in the business, and the liquidity:

• The business interest can be sold to a third party or back to the company, with the proceeds divided between the spouses as part of the divorce settlement. If a new person becomes involved in the business it can be disruptive.
• Shares can be transferred to the non-owning spouse, making them co-owners. This spouse may lack the necessary business expertise or experience to make informed decisions, negatively impacting on the business. Shares also usually carry voting rights, so unless the Memorandum of Incorporation (MOI) states otherwise, transferring shares can transfer voting rights, potentially shifting the control of the business. 
• One spouse can buy the other spouse’s interest, based on the valuation. This requires liquidity or funding, which may not be available.

If no agreement is reached on how to divide the business assets, the court will decide. This can lead to a forced sale, valuation disputes or other arrangements that do not benefit either side.

Tax implications of selling or transferring shares in a business

Selling business shares may trigger a taxable capital gain. The maximum effective tax rate for individuals and special trusts is 18 percent, for companies it is 21,6 percent, and for other trusts it is 36 percent. Some exclusions may include:

- An annual exclusion of R50 000 capital gain or loss for individuals and special trusts.

- A small business exclusion of R2.7 million for small business owners 55 or older whose business has a market value of R15 million or less.

If assets, including business shares, are transferred to a spouse as part of a divorce settlement, the South African Revenue Service (SARS) allows for the gain or loss to be rolled over until they are sold. 

The transfer has to be in terms of a court order for the division of assets, or a divorce order.  The receiving spouse inherits the original acquisition date and base cost.

Protecting your business against divorce

If you are married in community of property, you can enter into a postnuptial agreement if both spouses agree to this.  You will need to apply to the High Court, motivate your reasons for the change, and provide a draft ante-nuptial contract. You will also need to notify your creditors of the change and prove to the court that no one will be prejudiced by the change. All title deeds and mortgage bonds will have to be endorsed.

You can also include provisions in your company’s MOI or

partnership or shareholder agreement to protect your business interest against an owner divorcing. The agreement can state that unmarried shareholders must provide the company with a copy of their ante-nuptial contract before marrying. Or they can include a clause indicating that in the event of divorce, the partners have the first option to purchase shares before these are transferred to the other spouse or sold to a third party. This ensures that the owners retain control of the business. If the couple is married in community of property, the spouse must consent to this clause.

Choosing a legal structure such as a trust separates ownership and personal assets. If you place assets in a trust, make sure it is done for the right reasons and at the right time. If the court suspects that you did this to hide assets at divorce, they may disregard the trust.

Establishing a private company rather than operating as a sole proprietor can also ring fence personal and business assets. Make sure that you always keep personal and business expenses separate, and keep updated records, which will benefit the valuation process.

It is always best to consult an attorney to ensure that you have established the right business structure to safeguard your business interests.