Law

Avoiding the Pitfalls of Divorce as a Business Owner

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By: Hagit Lev

It goes without saying that divorce is an incredibly difficult process for anybody. Business owners, however, face special challenges and concerns when it comes to dividing up finances—especially if both partners were active in the business.

One concern is that one spouse may take measures, such as ordering foreclosure or travel restrictions, that could harm the company’s ability to function and generate profit, or the limit other spouse’s ability to continue operating in her role in the company. These measures may not only harm the functioning of the company in the short term, but also may cause clients, suppliers, or other business partners to lose trust in the company, resulting in long-term damage to the company’s reputation.

Another concern is the dilemma of dividing up the company’s shares between the partners. On the one hand, it may be better for the less active partner to sell his shares to the more active partner; but what if she doesn’t have the capital to pay for them? And will she need to pay taxes for them? On the other hand, if both partners maintain equal shares in the company, this can cause no end of conflict between the parties that may disagree on how the company should be run, especially if one partner hasn’t been very active in running the company and may be less experienced or knowledgeable.

There may also be a concern that one spouse will hide some of the company’s capital and tamper with the records to make it seem less valuable (and consequently, the other spouse’s shares will decrease in value), or otherwise sabotage the company’s ability to function and start a new, competing one after the divorce.

The first step to preventing these issues is, of course, hiring a skilled and experienced lawyer who specializes in helping business owners protect their rights and finances throughout the process of divorce.

When possible, it is recommended to try mediation (“gishur”). A skilled business ending a marriage in a rational, peaceful manner, without fights spurred by egos or childish vengeance fantasies, is best—not only in terms of protecting everyone’s inter­ests, but also because navigating this harrow­ing process through healthy means can be a source of spiritual and emotional growth for the whole family.

When it comes to dividing up company shares, if the company is a small family busi­ness, I almost always recommend against dividing the shares between the partners, instead having the less active partner sell her shares to the more active partner. There are a few reasons I recommend this:

  1. In a small family business, transferring half of the shares to a partner can lead to unending arguments about how to run the company, which not only creates personal turmoil, but also may harm the company’s ability to function and generate profit.

 

  1. In a small family business, the more active partner may take measures that will decrease the value of the other partner’s shares in the company.

 

  1. A financial arrangement forces the part­ners to work together after their separation is unwise and may unnecessarily prolong the separation process.

 

Therefore, I normally recommend hiring an expert to assess the value of the company, and then, the less active partner will sell his shares to the more active partner according to the price calculated by the expert.

As for the question of whether the active partner will need to pay taxes for this trans­action: fortunately, the law specifies that under certain conditions, the transfer of company shares between one partner and the other during the divorce process will not be considered a sale and will therefore be exempt from taxes.

Again, having a skilled lawyer as well as a knowledgeable accountant help guide you through the divorce process is a must if you want to ensure that your interests are pro­tected and that all parties emerge from the process with maximum satisfaction.

Hagit Lev Law Office provides comprehensive and sensitive legal services to clients before, during or after the process of divorce. They advocate an approach that manages the process with determination and wisdom, so clients can get what they deserve without hurting the people who are important to them. Hagit can be contacted at 050-240-4055, levhagit@gmal.com or through her website www.adv-office.co.il.

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