Dividing Sole Proprietorships During Separation
What is a sole proprietorship business?
A sole proprietorship is a business structure where one person owns and runs the business. The owner is personally responsible for all aspects of the business, including its assets, debts, and liabilities. Examples of sole proprietorships include:
Freelance or consulting businesses
Small retail shops
Home-based businesses
Trades or services, such as electricians or hairstylists
Dividing sole proprietorship businesses during separation
In British Columbia, sole proprietorship businesses are treated as family property and are subject to division during separation. Sole proprietorships are businesses that are owned and operated by one person and are not incorporated. These businesses, like other assets, must be valued and divided fairly between spouses.
How a sole proprietorship business divided?
Under British Columbia’s Family Law Act, the value of a sole proprietorship business acquired during the relationship is considered family property and is generally divided equally between the spouses.
If the business was started before the relationship, the initial value of the business at the start of the relationship is considered excluded property and remains with the original owner. However, any increase in the value of the business during the relationship is considered family property and is subject to division.
For example: If a spouse started a business worth $50,000 before the relationship, and the business is worth $150,000 at separation, the $100,000 increase in value would be divided equally between both spouses.
Valuing a sole proprietorship business
The value of a sole proprietorship is determined by calculating the difference between the business’s assets and its liabilities. There are several ways to value a business:
Professional Business Valuation: You can hire a professional to conduct a formal valuation of the business. This can provide a detailed and accurate assessment but may be costly.
Accountant’s Opinion: Many people choose to rely on their accountant to provide a reasonable valuation based on the business’s financial records. This is often a more affordable option.
What matters most is that both spouses agree on the business’s value. Reaching an agreement on the valuation can help avoid disputes and simplify the division process.
Options for dividing a sole proprietorship business
Spouses can divide a sole proprietorship business in several ways:
Selling the business: The business can be sold, and the proceeds divided according to the separation agreement.
One spouse buys out the other: One spouse may choose to buy out the other’s share of the business, becoming the sole owner.
Co-ownership: In some cases, spouses may agree to continue owning the business together, although this arrangement can be complex and requires careful planning.
Important considerations when dividing a business
When dividing a sole proprietorship business, it is essential to:
Obtain a professional valuation: The business should be professionally appraised to determine its fair market value.
Consider tax implications: Selling or transferring a business can have tax consequences that need to be addressed.
Evaluate ongoing liabilities: The business owner should consider any debts or liabilities associated with the business.
Assess income potential: The business’s future income potential may impact spousal and child support calculations.
Dividing a business can be more complicated than other types of property, and it’s advisable to consult with a family lawyer to ensure that the division is fair and that all financial and legal aspects are properly addressed.
Continue Reading
Important Disclaimer
Content and videos in The Divii Knowledge Centre provide general information about separation and divorce and is not and should not be considered legal advice. For guidance specific to your situation, it's important to consult with a qualified family lawyer in your area. It's always highly recommended to seek independent legal advice during your separation.