Kirsty McGuinness: Problems and pitfalls facing new family firms

The Scottish Government recently announced that it would provide £650,000 of funding to our corporate partner, Entrepreneurial Scotland, as part of its commitment to encouraging more people to be entrepreneurs in Scotland.

Kirsty McGuinness is an Associate in Turcan Connells Divorce and Family Law Team
Kirsty McGuinness is an Associate in Turcan Connells Divorce and Family Law Team

At Turcan Connell, we appreciate that setting up a new business can be both daunting and exciting. It will be a very busy time. Individuals setting up a new business may overlook the family law implications of doing so. Here, we highlight some common pitfalls and how to avoid them…

Setting up a limited company during marriage

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When one spouse sets up and acquires shares in a company during marriage, the value of the shares will be shared between the spouses in the event of subsequent separation. This is the case even when only one spouse owns the shares. The starting point is that the value of the shares will be shared equally between the spouses. This is the situation even if the business was created using wealth which was acquired before the parties married or funds acquired from an inheritance.

Married entrepreneurs may wish to consider protecting the value of their business by regulating what will happen in the event of any future divorce within a postnuptial agreement. Postnuptial agreements are effective tools for protecting business interests, particularly where pre-marital, inherited or gifted wealth is invested in a new business.

Setting up a limited company when cohabiting

It is not only married couples who can use family lawyers to protect their business interests in the event of a separation.

In Scotland, the courts can award a capital sum payment from one cohabitant to the other. The courts might do so where one cohabitant has been economically advantaged from the contributions of the other. Thus, where the non-business owner answered the home phone to arrange business meetings or appointments, he or she could have made a contribution to the success of the business. The non-business owner may raise a claim against the business owner for a payment of a capital sum.

Entrepreneurs living with a partner or considering moving in with a partner may wish to consider entering into a cohabitation agreement. Such an agreement could set out financial arrangements which come into play in the event of separation.

Setting up a business together

Solutions can be particularly difficult to find and implement when a once happy couple, who own a business together, separate. In these cases, there is often a dispute about who is to retain the business going forward. Time spent thinking about these things, when starting up the business may later prove to have been time well spent.

In such circumstances, a postnuptial agreement could regulate what is to happen to the individuals’ shareholdings in the event of a divorce.

With the assistance of one of our business law solicitors, couples can also consider entering into a shareholders’ agreement. Such an agreement could provide certainty and protection in relation to future ownership of the shares and control of the company.

Giving a spouse an interest in a business for tax reasons

Many people give their spouse an interest in their new business without appreciating the consequences of this gift in the event their marriage breaks down.

At separation it becomes apparent that an unconditional gift of shares has been made. The shares cannot automatically be reclaimed. Business owners ought to consider taking legal advice before taking any such steps.

And finally: Being in business with a spouse or partner can bring many advantages to a family. However, a later separation may result in much confusion, uncertainty and lengthy (and often unnecessary) arguments about the outcome for the business.

Most of these potential problems can be avoided by early and tailored planning.

For more information on any of the agreements discussed in this article, please do contact a member of the team today.

Kirsty McGuinness is an associate in Turcan Connell’s divorce and family law team