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We spoke with Lisa Gelman, founder of Gelman & Associates, about the process of dividing a business during a divorce in Ontario. For over 20 years, Gelman & Associates have been helping individuals with family law matters including business and corporation owners. Please note that the answers are not intended to act as legal advice, but instead act as a general overview on a legal topic. For more specific answers as they relate to your separation or divorce matters in Ontario, we recommend you contact our law firm for a free consultation with a family lawyer.
How does a business get divided during a divorce in Ontario?
There are provincial laws in place for dividing property when a marriage ends. Typically, both spouses take an even split of property they have acquired over the course of the marriage. For property that one of the spouses had prior to the marriage, the equal split is based on the amount the property value increased from the date of the marriage to the date of separation.
A business is considered property. If there is no pre-nuptial agreement or marriage contract stating otherwise, the value of a business may be split between both spouses following a divorce. Depending on the specific circumstances, there are several ways this split may be calculated.
If both parties own the business equally, then the value of the business will be attributed to both spouses in their financial statements. Upon divorce, the business will likely be split equally. If, however, one party owned the business prior to entering into the marriage, then the equal split will be calculated based on how much the business’ value increased during the marriage. If the business was acquired through an inheritance or as a gift during the course of the marriage, it may not be subject to division – unless it is tied to other marital assets (e.g. the matrimonial home).
Issues may arise when both spouses wish to continue being involved in running the business, especially when both are entitled to do so. However, every situation is different and we recommend consulting with an Ontario family lawyer if you find yourself in this situation.
How can my divorce affect my business operations in the future?
While everyone hopes for a smooth divorce, the process of separation can become contentious. As emotions run high, one spouse may attempt to leverage the business against the other spouse, or make professional choices that undermine the business itself. In situations where the former spouses decide to continue collaborating on the business, ongoing communication is often key. It may also be useful to draft a formal agreement as to the terms of your professional partnership.
My spouse and I cannot work together after the separation. Can I purchase my spouse’s interests in the business?
If your former spouse agrees to sell you their interests in the business, then you can purchase their share. If you cannot come to an agreement, you may need to initiate a forced sale. In such a case, the business may be sold to the highest bidder.
Can you exclude a business and its assets from your net family property and support obligations in a marriage contract?
A business and its assets can be excluded from potential net family property divisions through a marriage contract or pre-nuptial agreement. Spousal and child support obligations are typically calculated based on your income, including your net income from a business (once expenses have been deducted). In a marriage contract, you may stipulate how you wish to address spousal and child support obligations in the future.
I started my business on my own without my partner. Does this change the division process?
If you built your business from the ground up while you were married, and your former partner is not involved in it, then the business is yours. There will likely be no contention as to who has ownership of the business itself. However, calculations may still be made on how much your business has increased in value over the course of your marriage. This number may be used to determine the net family property that will be split equally between both spouses.
How can I protect my business before and during a divorce?
At Gelman & Associates, we recommend preparing a thorough pre-nuptial agreement to help protect both parties and mitigate future conflicts such as this. While it may be challenging to consider the terms of your separation when you are in the early stages of a relationship, having a marriage contract in place can help provide peace of mind. You may be able to protect your business by including clear guidelines in your pre-nuptial agreement as to who will retain ownership should you and your spouse separate, and how this property will be split.
We have decided to split our business assets. What do we need to consider?
If you have decided to split your business assets, you will likely need to hire a business valuator who may calculate the value of your company by reviewing your past and projected earnings, and quantifying its securities and/or intangible assets. You will also likely need to work with a family lawyer, who can help articulate how you wish to split your assets. You may also wish to consider how you would like to navigate business operations if you and your ex-spouse are joint owners of the business, especially if you disagree on who will continue to work there.
What if my ex-partner was not as invested in the business as I was?
It would be very difficult to prove the full extent of an ex-partner’s investment in the business. If you and your ex were married, and there is no pre-nuptial agreement in place stating otherwise, they may be entitled to an equal share of your business or its increase in value over the course of your marriage.
Can the non-owner spouse contest the business valuation report and obtain their own valuation?
Both spouses are entitled to contract a business valuator to conduct a report. It is therefore within a non-owner spouse’s right to contest their ex’s report, and obtain their own valuation and/or produce a critique report.
What steps can be taken to minimize financial stress on the business?
At Gelman & Associates, we recommend pre-nuptial agreements in order to minimize future financial stress, business or otherwise. A pre-nuptial agreement should typically include clear stipulations on how the business may be split following a divorce. Likewise, being honest about the state of your finances – both personal and business – may contribute to a clearer, more amicable, streamlined process should you need to calculate how to divide your property during a divorce.
What happens if I start a business before my divorce is finalized?
Net family property – the property that will be divided in a divorce – is restricted to property accrued and/or grown in value during the timeline of your marriage. From the moment of your separation, any wealth or debt you accumulate is your own, and will not be included in the calculations of your net family property. Therefore, if you start a business after you have been separated but before your divorce is finalized, it should not be affected by your divorce.
Book a Free Consultation with Gelman & Associates
To discuss the specifics of your case, including how your separation and/or divorce may impact your business, contact us to book a consultation with Gelman & Associates today.