Divorcing if you own your own business: this is how it works

Nearly 40% of all marriages in the Netherlands end in divorce, according to 2018 figures from Statistics Netherlands. It could happen to you and your partner too. Big questions loom large when you are taking the first steps to really get the divorce going. How will you manage it all as a practical matter? What are the consequences for my business? Can I ensure continuity? And is my partner also entitled to a share of the value of the company? 

Survival of your business 

A divorce affects your business, both at the level of day-to-day operations and financially. The survival of your business is one of the things that should come first. The business is a part of your life: it provides you with income and it represents a value. A forced termination of the business does not benefit either partner. After dealing with the initial intense emotion, it is advisable to handle the process of divorce as calmly and rationally as possible. Realise that emotion is not the best counsellor. Try to get through it all together with a bit of give and take. 

Prenuptial agreement or community of property? 

How you got married plays a big role when it comes to divorce. In a community of property, there must be a division of all assets and debts. The value of your business may fall within the community of property. 

Many business owners have drawn up prenuptial agreements, and in doing so have built in security to cover uncertain future events. If you also have prenuptial agreements, at least that will save you a lot of negotiating. Especially if you have kept your company's assets and debts out of the community of property. In the event of a divorce, the division of the value of your business will then not be an issue. 

A settlement clause in a prenuptial agreement 

However, there is an important point to consider when the divorce proceedings start. Are your prenuptial agreements still up-to-date? When prenuptial agreements are being drawn up, a 'settlement clause' is often included. That is a commitment that partners will coordinate financially on an annual basis. 

Groningen notary André Bosscher is not exactly in favour of a settlement clause in prenuptial agreements. “The marital partners must actually conduct themselves according to those prenuptial agreements.” If your prenuptial agreements have been stashed in a kitchen cupboard for years and you have never acted on them, a judge can rule that there is community of property after all. And with that, the well-arranged security you had thought up all those years ago is down the drain. 

Your ex calls KVK 

The advisers on the KVK Advice Team get questions about divorce every day. Remarkably, most questions come from the partners of business owners. What the questions have in common is that partners do not know enough about their partner's business. What is it about? Do I have the right to inspect the books? Bosscher: “With a settlement clause in the prenuptial agreement, there does need to be a certain degree of openness. Again, keep acting in accordance with the terms of your prenuptial agreement.” 

Change to community of property  

On 1 January 2018, the Limitation of Legal Community of Property Act (Wet beperkte gemeenschap van goederen) came into effect. If you were married without a prenuptial agreement before that date, all assets and debts prior to the marriage fall under the community of property. Also the value of your business. If you got married after 1 January 2018, the assets you accumulate together from the date of marriage are communal. If you already had a company then, it remains private. As an entrepreneurial partner, you then have to pay compensation to 'the community'. This means that, as a business owner, you share a pre-agreed amount, from the business, with your partner during your marriage. This is to avoid setting aside disproportionate amounts in your business out of reach of your partner. 

The process of divorce 

If you want to come to an agreement together, you should consider bringing in a mediator. This independent facilitator can identify your needs and take the process in the right direction. The final agreement in which you lay down how the divorce will take shape is called a divorce agreement. This lays down the division of assets, any maintenance obligations and the agreement on the future settlement of pension payments, for instance. If there are children, you should also make a parenting plan. You must submit the petition for divorce to the court with the help of a lawyer. The judge will then also include the agreements from the divorce covenant and parenting plan in the divorce decision. 

If during the divorce process joint consultation is no longer working, each partner will have to hire a lawyer of their own. Communication will take more time, and costs will be higher. And one more thing: you will no longer be able to make all the choices you want. 

Is it impossible, even with help from the lawyers, to reach agreement? In that case, the judge will finally rule and, if requested in the proceedings, will also determine the division of joint assets and debts. After a judge's ruling and the expiry of the appeal period, the divorce is registered with the municipality. At that point you will actually be divorced. 

Note that, even if you are actually divorced, certain assets still need to be divided separately by the notary. If a house or the shares of a bv were part of the community of property during the marriage, these assets must be allocated by a notarial deed of partition to the ex-partner who continues with them. 

Registered partnership 

If you are not married but are registered partners, the same rules apply when you separate. There is an exception to this if you have no children or the children are over 18. In that case, you can divorce without having to go to court. However, a termination agreement must be made with the help of a lawyer or a notary. The lawyer or notary sends the termination agreement to the municipality. Once the termination agreement is registered with the municipality, you are divorced. 

What is the value of my business? 

A simple starting point is the value reported in the accounts, on the balance sheet. Possibly with an adjustment if the actual (market) value is higher. But what if your consulting business only has a laptop on your balance sheet, or what if the business property has a hefty capital gain? Or you have to apply for financing  for your partner's buyout, which will reduce your profitability considerably? For that reason, the valuation of a company involves more than just the value on the books. The simplest and cleanest way to determine the value of a company is to look at future cash flows. This takes into account future opportunities and threats the company anticipates. This type of business valuation is usually done by an expert, such as an accountant or a valuation specialist. 

Buying out your partner 

You can also buy out your ex-partner. Gerard Hoving of Harrier Accountants takes on divorce cases as a mediator. “After a valuation of the company by the accountant, the amount with which you can buy out your ex will come into the picture. If the continuity of the business is at risk, we try to spread the amount over a period of time.” Hoving also says it is important that both partners adopt a constructive attitude: “The first concern is not to jeopardise the business. A divorce petition should preferably be made jointly – just my two cents. There should be no bickering about who pays for the cost of caring for the dog. Keep things nice and practical.” 

Alimony obligations 

If you have children, both of you will have to contribute, according to your means, to the their expenses. This is called child support. In addition, one partner may have to pay spousal support, or alimony, to the other. To calculate whether this should be done and how much will need to be paid, the means of the party with the higher income and the needs of the party with the lower income are considered. 

In most cases, the period during which spousal support must be paid is equal to half the number of years you were married, and can be no more than five years. That said, there are few exceptions. 

As a business owner, does your income fluctuate a lot, because of seasonal work or self-employment, for example? Again, Hoving stresses that partners need to be creative and willing to work together: “Try to stipulate in the covenant that reviews will take place regularly. The amount of spousal support can then be adjusted periodically.” 

The legal form of your company 

The legal form of a company indicates who owns it, what taxes apply, and how liability is regulated. 
However, a registered legal structure does not always reflect the actual relationships in practice. 

Divorce and eenmanszaak 

Your company is privately owned. The value of your business falls into the community of property. Your partner is entitled to half the value. That is, unless prenuptial agreements provide otherwise or if you are married after 1 January 2018 in limited community. Does your partner stop working in the business? Tax deductions such as co-work deduction, or an allocated real work remuneration, are then no longer deductible from profits. 

Bosscher: “If you have drawn up prenuptial agreements and because of that the bank wants your partner to co-sign for a business loan, you need to tread carefully: outside the prenuptial agreement, your partner will still be financially liable.” A bank wants collateral for a business loan. It is therefore common for the non-entrepreneurial partner, who has a job, to co-sign. A divorce later on could mean the loan becomes payable in a lump sum. 

Divorce and vof 

Do you and the partner you are divorcing have a vof together? Even in that case, the value and assets of the business fall into the community of property to be shared. Unless prenuptial agreements apply.

Often, this vof (husband-wife firm) exists for tax reasons. Both partners can then separately claim tax deductions, subject to conditions. Is your partner quitting? Then these deductions only apply to you as the remaining owner. Profits will be taxed more than you were used to before. 

Is your partner leaving the vof? You must report the change to the KVK Business Register. Your partner can also, during and after the divorce, simply remain active in the company as a business partner. After the divorce is finalised, you will each remain jointly and severally liable for the business. Do keep in mind that any new private relationships in the future may also fall under the company's liability. 

Divorce and bv 

Ownership of a bv consists of owning its shares. You divide the actual market value of the company by the number of shares. This true value of the shares falls into the community of property, unless valid prenuptial agreements provide otherwise. 

Is your partner, like you, also a shareholder in the bv? If your partner wants to get rid of these shares, or you want to buy them, they must first be offered to you and any other shareholders. Unless the bv's articles of association provide otherwise. To transfer shares, you need to go to a notary. 

Help 

Do you have questions on divorce and your business, and are you unable to figure things out? Just get in touch with KVK. Together, we can explore your situation and see how we can help you along.