Beyond Tax Savings : Key Legal Considerations When Your Spouse is Involved in Your Business: With Guest Kit O’Brien

Beyond Tax Savings : Key Legal Considerations When Your Spouse is Involved in Your Business: With Guest Kit O’Brien

Have you ever been advised to include your spouse as a shareholder/employee in your company?

Accountants often suggest using this as a tax planning strategy, which involves distributing profits to both you and your spouse in a tax-efficient manner through a combination of salary and dividends.

Of course along with the financial benefits there are other good reasons to go into business with a partner, perhaps you have complimentary skill sets, shared common goals and/or wish to benefit from the flexibility of running a venture together.

However, besides tax planning, what other factors should be taken into account when granting shares to a spouse or transferring financial interest in your business?

I recently spoke to Kit O’Brien, an experienced Legal Director and Solicitor at Shakespeare Martineau, who specialises in divorce and financial issues to find out more on this. And to get the low down on the implications should the worst happen and relationships break down.

Q: We’ve heard how there can be some tax efficient reasons to involve a spouse in your business, but what is the legal perspective on this recommendation?

K O’B: It’s all too common to see cases where what might have been a good idea from an accountancy perspective is less attractive on divorce!  That doesn’t mean that the accountancy advice shouldn’t be followed, simply that you should ensure you think about how you might be affected if things don’t work out personally. 

Bear in mind that there’s no such thing as a common law spouse – if you’re not married you have no claims against your former partner based on your personal relationship.  Any claim you do have will be based solely upon your formal interest in the business you were running together.

Q: OK, so let’s assume that you’re married and either running a business with your spouse or have been allocated shares for tax efficiency purposes.  What happens if you divorce?

K O’B: Well certainly the shares may well need to be valued. Not all company shares have intrinsic value – the company may simply be an income generator with few assets.   If the company has been built up during the relationship it’s likely that the shares will be a viewed as a marital asset although if one party hasn’t been involved in the business the other may argue that their contribution is relevant and should be reflected.  Assuming that there’s no argument for the shares to be ringfenced, i.e. left out of the equation, the starting point is that marital assets are shared equally. 

How they’re divided is going to depend on what the assets are overall.  If one party is going to continue running the business they will obviously want to retrieve the other party’s shareholding.  Whether that will be possible is going to depend on the value of the shares and whether there is capital to buy out the shareholding or other assets that could be offset against it.

The worst case scenario is of course a sale of the business but the aim is always to avoid that especially if it’s primarily an income generator.  There’s certainly a risk to trading if both parties are active in the business – it’s all too easy for their personal situation to become widely known which can affect confidence in the business.

Q: Thank you that is really insightful, but also sounds like it can get quite complicated. How can you plan ahead to limit negative consequences?

K O’B: If you’re running a business and your accountant suggests making your spouse a shareholder don’t be afraid to have a serious talk with the accountant about the long term implications of that.   Should you look at restructuring your shares – perhaps have different share classes that don’t have the same voting rights.  By all means maximise your tax efficiencies but don’t be afraid to think about where that might leave you if your relationship doesn’t work out.

Make sure you have a shareholders agreement.  That can set out a mechanism for valuing shares.  It can restrict to whom shares can be transferred – you might be very glad of that if it avoids an unhappy spouse trying to transfer shares to a competitor! 

If you’ve set up your business before you get married consider a prenuptial agreement that establishes how the business will be treated on divorce.  Although such agreements still aren’t guaranteed to be binding in this country if done properly with the benefit of independent legal advice on both sides they’re more likely than not to be upheld.

If you know your relationship is sadly coming to an end think about the implications of investing in the company or purchasing significant assets which may have to be realised on divorce.

Q: Some excellent suggestions there, what professional advice would you recommend one should seek before making any decisions?

K O’B: Take advice from your accountant and company lawyer when you set up your business.  Take advice before you make any changes to its structure.  Prevention is always cheaper than cure!

Don’t even consider trying to resolve financial issues on divorce without the benefit of legal advice. Family lawyers do not set out to make matters less amicable. We are there to ensure that people can make informed decisions not just emotional decisions.

 Financial resolution on divorce can be complex especially where there are business interests involved and it’s essential that both parties have specialist legal advice to help them achieve a fair outcome.

Thank you Kit for sharing your knowledge and joining us as a guest. Your insights and experience have enlightened what can be a tricky topic to navigate as a business owner with some clear practical and preventative steps to consider (aside from those tempting tax savings).

Have more questions?

If you found this article helpful and have more specific questions relating to your situation, you can connect with Kit O’ Brien.

Kit O’Brien, Legal Director and Solicitor at Shakespeare Martineau

Hi, I’m Harriet, your trusted CFO, Business Growth Specialist, and Finance Educator.

I am the founder of Below The Line Finance and my mission is to financially empowering creative entrepreneurs to build aligned businesses  – with profit, purpose and healthy cashflows!  With my collaborative and supportive approach, I am dedicated to guiding you to greater confidence and success with your business finances. What could you accomplish with your very own Mini CFO?

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Small Business CFO, Below The Line Finance