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What happens if co-directors divorce and each own half of the business?

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What happens to a limited company when joint directors have 50/50 shares but get divorced?

When joint directors get divorced, their limited company is generally viewed as a ‘matrimonial asset’ to be valued and distributed along with other assets. Although the initial premise of the court in divorce proceedings is to divide ‘matrimonial assets’ equally between both parties, each case is different and many other factors are taken into consideration.

These include personal assets such as pensions and equity in the home, so it’s crucial to obtain specialist advice if you own equal shares with your spouse and you are separating or seeking a divorce. As with any matrimonial dispute, each case is unique, and other factors related to your own situation come into play.

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The future of your business: factors to consider

A number of possibilities need to be considered with regard to the future of your business. These include whether you might:

  • Continue to work together in the business, retaining the same shareholding but formulating a new and detailed shareholder agreement to assist in the smooth running of the business, even if it is only a short-term solution
  • One of you buy the other out if this is financially viable – it may be possible to do this via an instalment arrangement if a lump sum of cash is not available
  • Close down the business, or sell it to a third party
  • Divide the business equally so that you and your ex-spouse can each run your own separate company - the success of this clearly depends on the type of business you own

Any of these options involves a complex and potentially lengthy legal process, and if you decide to sell or divide the business you will need to have it professionally valued - preferably on a joint instruction with your co-director in order to prevent a large variation in value.

If your spouse has had little input to the business on a practical level, you may be able to argue that the valuation provided depends largely on your own efforts. Other issues arise if personal guarantees have been provided for company borrowing.

Deadlock in the boardroom

One of the initial issues may be that, because of the equal shareholding, decisions cannot be made unless both parties agree. If the divorce is acrimonious, this can considerably delay proceedings and increase your legal costs.

Deadlock occurs when you hold an equal number of shares and both have the same voting rights, and can ultimately cause a loss of business if the situation is not quickly addressed.

Transferring shares between directors

If you or your co-director decides to leave the business, the other party or the company itself may buy back the shares. There are tax implications for both parties, however, which is why it’s crucial to obtain specialist legal and financial advice under these circumstances.

Although it may be you who decides to exit the business, you should retain office as director and keep your status as an employee until the remainder of the legal affairs relating to the divorce are complete.

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On the other hand, if you wish to buy out your partner, it may be possible to obtain the finance needed to do so. Real Business Rescue can offer more detailed advice and guidance tailored to your situation, and has connections with over 50 alternative lenders around the UK.

We are a major part of the Begbies Traynor Group, the largest professional services consultancy in the UK, and operate from 100+ offices throughout the country. Call one of the team for a free same-day meeting in complete confidence.

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