Business owners futureproof their businesses by limiting risks, which can be personal as well as commercial. Planning for death and ill-health should include key person insurance, wills, and lasting powers of attorney. Another risk that can be avoided is the hugely detrimental impact of relationship breakdown.
To prepare for his, having a shareholder's agreement or a partnership deed is necessary to outline what should happen in case joint business owners fall out.
It's also advisable that business owners who are married or in a civil partnership have a nuptial agreement to protect the business in the event of a divorce or dissolution. Similarly, business owners who are living with their partners should have a cohabitation agreement.
It can be very difficult to run a business while dealing with the fall out of a separation. All too often, relationship breakdown leads to disputes because couples cannot agree the division of the finances. These disputes can be lengthy and expensive, and they place a very real strain on the business owners going through them.
Around a quarter of people in the UK who live in a couple are cohabiting. Cohabiting couples remain the fastest growing family type. Sadly, approximately 42% of marriages end in divorce and, while we cannot monitor the statistics for cohabiting couples in the same way, the proportion will be similar, if not higher.
No one wants to think about separation, but it's a fact of life and it comes with risks which can ultimately be avoided. It's far easier to discuss and agree matters when a relationship remains strong instead of leaving it until after separation when communication and trust have often broken down.
Despite the increase in cohabitation, there's a lack of understanding about how the law works, which often leads to misunderstandings and disputes in practice. The problems are exacerbated because couples don't discuss their finances and they don't plan properly for what would happen if they were to separate. If separation occurs, disputes can often arise when each party has different expectations about the outcome.
Legally, the starting point is that each party retains their respective assets so we look at who is the legal owner. When a cohabiting relationship breaks down, neither party has financial claims against the other, except in relation to any children, so it's usually a matter of trying to work out who owns what and dividing assets on that basis.
However, unravelling finances when cohabitation breaks down can often be complicated and expensive. The couple may be joint legal owners of a business, in which case they are separating their professional, as well as personal lives. In cases where there is one legal business owner, the non-legal owner may still be able to claim a beneficial interest. There may be arguments that the business owner holds the asset on trust for the other party. A trust doesn't have to be in writing and it can be established with reference to the parties' intentions and their course of dealing during the relationship. It's also possible for non-legal owners to pursue claims based on promises made which have been relied upon and caused detriment.
It's often not just as simple as saying one party retains the business. Dividing lines may be blurred for many reasons, including if a cohabitee is given shares or appointed as director, if the couple's home is offered as security for business borrowing, or because joint funds have been invested in the business.
It may be that the dispute relates to other assets and not the business itself. However, having to deal with any dispute will affect the owner's ability to focus on the business.
Whatever arrangements are put in place, business owners should take proper advice, consider the options, agree with their partner what they both intend and enter a cohabitation agreement by way of a record. A properly drafted cohabitation agreement, which is kept under review as finances change, is the best way to avoid unnecessary disputes further down the line.
Cohabitation agreements will be bespoke to the couple and they can cover a variety of matters, including who owns what (including existing and anticipated future wealth), to what extent, if at all, there is financial support between the couple; and what happens in practice in the event of a separation.
Sue Brookes is a family solicitor specialised in cohabitation issues. For further information and advice, please visit Mills & Reeve to find out more.