Business and divorce

A single person owns, operates and controls the business for their personal benefit frequently using a distinct trading name. Staff may be employed. All assets are personally owned and all liabilities are personal debts. The owner and business are as one and the owner is assessed to tax on the profits made by the business each year.

A partnership can either be unincorporated (where personal ownership attaches to the assets and personal liability attaches to the debts) or incorporated, e.g. a Limited Liability Partnership (LLP). The distinction is important in terms of potential liability for partnership debts.
The partnership may be governed by a formal written deed or may be informal, e.g. usually between a small group or between husband/wife. Again, a trading style may be used and staff employed.
The assets are owned by the partners (according to their shares) and in the case of an unincorporated partnership the partners are all jointly and severally liable for all of the partnership’s debts. It is as though the partnership is a collection of sole traders grouped together. Partners of an LLP may have limited (but not unlimited) liability for debts.
Partners are assessed to tax on their share of the profits made by the partnership each year.

A company is a separate legal entity and is operated by its directors on behalf of the shareholders. In many instances, the directors and shareholders are one and the same, usually husband/ wife or with other family members, for reasons of tax efficiency. Matters become more complex when unconnected persons are also shareholders as their wishes cannot be ignored. All persons working for the company are employees (including the directors) and will be paid under the PAYE regime. Shareholders may receive dividends, the amount of which is decided upon annually by the directors. Whilst the annual profits of the company are taxed (corporation tax) the amount of profits earned in any year are not wholly allocated to the owners as income. The directors decide when profits are paid out to the shareholders. The income taken by director/shareholders can therefore be manipulated/structured to achieve the best tax efficiency. It is then necessary to consider what profits could be paid out rather than what income is paid out.

This type of business usually has a small sole trader structure, but sometimes (for reasons of tax efficiency) is operated in the guise of a limited company structure. The business is usually a single person providing their own labour, whether as a tradesman or professional service provider, e.g. consultant surgeon, to a variety of clients. There are no ongoing contracts and it is highly unlikely there would be any premium for a sale of the business to a third party, even if there was a business to sell. In this instance, the business is considered an income stream and its value is taken as the value of the net assets in the business.

For a property/ investment based business, it is the value of the property/ investment that is important as there is no underlying trade. Consideration must be given to the value of each individual asset and any necessary revaluation of assets will be incorporated into a revised balance sheet to reach the overall value of the business.

To calculate the net value, it will be necessary to consider both the potential amount of tax that would arise on a sale of the property as well as the tax that would arise on extraction of the funds from the business.

Any business (other than income stream type) that is trading in nature with a view to making profits is usually valued according to its profits. The circumstances of the business are considered and a calculation is performed to assess the annual maintainable earnings. That figure is then multiplied by the price/earnings ratio to get to the total value of the business and the value of an individual’s interest is then calculated relative to that total.

Adjustments may be required for factors such as debt, surplus assets or minority shareholder discount, dependent on the individual circumstances. A valuation will also be considered on an asset basis and the greater figure will generally be the value of the business.

The calculations performed to reach the maintainable earnings will also be relevant for consideration of the income that the business can provide to its directors/ shareholders, and will be relevant for consideration of spousal and child maintenance.

The potential incidence of Capital Gains Tax will also be a feature of the calculation of the (net of CGT) value of the parties’ interests in each business.