An unincorporated business is any business that is not set up as a corporation. These businesses are owned directly by one or more individuals rather than by a separate legal entity.

Unincorporated businesses can include:

• Sole proprietorships
• Partnerships or joint ventures
• Independent contractor or consulting businesses
• Home based businesses
• Trades and service businesses
• Professional practices

In an unincorporated business, there is no legal separation between the owner and the business. The owner is personally responsible for the business’s assets, debts, and liabilities.

In British Columbia, unincorporated businesses are treated as property under the Family Law Act and must be addressed when spouses separate.

If an unincorporated business was started, operated, or grew during the relationship, its value is generally considered family property and is subject to division, regardless of whose name the business is in or who primarily ran it.

This applies whether the business is a full time source of income or a side business developed during the relationship.

Under the Family Law Act, the value of an unincorporated business that was acquired or increased in value during the relationship is generally divided equally between spouses.

If the business existed before the relationship began, the value of the business at the start of the relationship is usually excluded property and remains with the original owner. Any increase in value during the relationship is considered family property and is divided equally.

For example, if a spouse started a business worth $50,000 before the relationship and it is worth $150,000 at separation, the $100,000 increase in value is typically divided equally.

Valuing an unincorporated business involves more than looking at income. The goal is to determine the overall value of the business as an asset.

This often includes:

• Business assets such as equipment, inventory, and receivables
• Business debts and liabilities
• Income and expenses
• Goodwill, which reflects the value of the business beyond its physical assets

The valuation should reflect what the business is actually worth, not just how much money it makes in a given year.

When valuing an unincorporated business, it is critical to consider both debts and taxes so that you arrive at a realistic net value.

Business related debts may include loans, lines of credit, equipment financing, unpaid taxes, or amounts owed to suppliers. These liabilities reduce the value of the business and must be accounted for when determining what is available to divide.

Taxes are also an important consideration. In some cases, selling a business or transferring an interest in a business can trigger income tax or capital gains tax. Even if no immediate sale is planned, future tax consequences may affect the true value of the business.

For this reason, business valuations often focus on net value rather than gross value. Net value reflects what the business owner would reasonably keep after paying debts and accounting for tax implications.

Because business valuation involves financial records, judgment calls, and tax considerations, it is often helpful to involve a professional.

An accountant can help analyze financial statements, identify business debts, and estimate tax consequences. A professional business valuator can provide an independent and detailed valuation, which may be particularly useful for larger or more complex businesses.

While professional valuations can involve additional cost, they often save time and reduce conflict by providing clarity and a shared understanding of the business’s value.

What matters most is that both spouses understand how the value was calculated and are comfortable that the number used in the Separation Agreement reflects a fair net value.

There are several ways to address an unincorporated business in a Separation Agreement.

• One spouse keeps the business and compensates the other through an equalization payment
• The business is sold and the proceeds are divided
• In some cases, spouses continue to co-own the business for a period of time

Continuing to jointly operate a business after separation can be complex and emotionally challenging. If co-ownership is chosen, the Separation Agreement should clearly address management, income, expenses, decision making, and exit options.

Unincorporated businesses are often closely tied to a person’s income and future earning potential. Taking the time to properly value the business, including debts and tax considerations, helps ensure a fair and durable outcome.

Speaking with an accountant or business valuator, and documenting the agreed value clearly in your Separation Agreement, can reduce uncertainty and help both spouses move forward with confidence.