Dividing Corporations During Separation
What Is a corporation?
A corporation is a business structure that is legally separate from its owners (shareholders). Unlike a sole proprietorship, a corporation can own assets, incur liabilities, and enter into contracts in its own name. The spouses may own shares in the corporation, and the value of those shares is what needs to be divided.
How is a corporation divided?
In British Columbia, corporations are considered family property and must be divided during separation if they were acquired or grew in value during the relationship. A corporation is a legal entity separate from its owners, and dividing it can be more complex than dividing a sole proprietorship.
The division of a corporation depends on the value of the shares owned by the spouses and whether the corporation was established before or during the relationship:
If the corporation was started during the relationship, the entire value of the business is typically considered family property and subject to equal division.
If the corporation was started before the relationship, the initial value of the business is considered excluded property. However, any increase in value during the relationship is considered family property and must be divided.
For example: If a spouse started a corporation worth $100,000 before the relationship, and it is worth $500,000 at separation, the $400,000 increase in value is considered family property and is divided equally between the spouses.
Valuing a corporation
Valuing a corporation can be complex, as it involves assessing the business’s assets, liabilities, and future income potential. Here are some common methods for valuing a corporation:
Professional business valuation: Hiring a business valuator can provide a detailed and accurate assessment of the corporation’s value. This is often necessary for larger or more complex businesses.
Accountant’s opinion: For smaller corporations, an accountant’s opinion may be sufficient to provide a reasonable estimate of the business’s value.
It is essential that both spouses agree on the value of the corporation to avoid disputes.
Using Divii to prepare your Separation Agreement: Dividing a corporation
When dividing the value of a corporation using Divii to prepare your Separation Agreement, it is important to identify whether you have a controlling interest in the company or if you simply hold shares without control:
Holding shares: If you hold shares but do not control the company, you can add those shares in the Other Property section of the agreement.
Controlling interest: If you have a controlling interest in the corporation, you need to identify the portion of the company owned by you or your spouse. For example, if you own 75% of the shares and the remaining 25% is owned by other shareholders, you would list 75% of the corporation as family property.
Determining the value of shares
Next, you need to determine the value of the shares considered family property. If the corporation is worth $4 million, and you own 75% of it, the portion to be divided between you and your spouse would be valued at $3 million, as the remaining $1 million belongs to other shareholders and is not part of the division.
Divii will also ask for details about the share structure of the corporation. For example, if there are 1,000 outstanding shares and both spouses own an equal number of shares, you would record that Alex owns 500 shares and Jordan owns 500 shares. If Alex is continuing to run the company, the agreement may state that Jordan will transfer their shares to Alex as part of the settlement.
Identifying ownership and share structure
When dividing a corporation, it is important to determine the portion of the corporation that is owned by either spouse. If you or your spouse hold a controlling interest in the corporation, you will need to account for the value of the shares considered family property.
For example: If you own 75% of the shares in a corporation, and the remaining 25% is owned by other individuals, only your 75% ownership is subject to division between you and your spouse. If the business is worth $4 million, you would list the value of your shares as $3 million, since the remaining $1 million belongs to other shareholders.
If both spouses own shares, you should document the share structure in the agreement. For instance, if there are 1,000 outstanding shares, and each spouse owns 500 shares, you need to decide how those shares will be handled. One option is for one spouse to transfer their shares to the other spouse as part of the agreement.
Options for Dividing a Corporation
Spouses have several options for dividing a corporation during separation: one spouse buys the other out, continuing co-ownership, or rolling over your shares into a new company.
One spouse buys out the other
One spouse may buy out the other’s shares, becoming the sole owner of the corporation. This does not cause any tax implications, but make sure you speak to your accountant.
Co-Ownership
In some cases, spouses may agree to continue owning the corporation together. You can do this by agreeing to transfer shares between you. However, this arrangement can be complicated and requires clear agreements on management and profit distribution. You may require consent of other decision makers within the corporation.
Rollover your shares into a new company
One option in Divii is to "Rollover your Shares to a New Company". It's often referred to as a butterfly transaction. In a separation or divorce, it is a way to split assets fairly without causing big tax problems. It is often used when a couple shares a business or property and wants to divide it without selling it right away.
How It Works:
Instead of selling and splitting the money (which could cause tax issues), the business or property is restructured so each person gets an equal share. This allows both people to own their part separately without forcing a sale.
Why It's Helpful:
Rolling over your shares into a new company is helpful in a few ways. It helps to avoid high taxes when splitting assets, it keeps things fair by dividing everything evenly, and it prevents problems with selling valuable assets too soon.
It's important to talk to your accountant for advice on the most tax-efficient method for your circumstance.
Important considerations when dividing a corporation
When dividing a corporation, it is essential to:
Obtain a Professional Valuation: To ensure an accurate division, a professional valuation may be necessary.
Consider Tax Implications: Transferring shares or selling a corporation can have tax consequences that need to be addressed, but typically the transfer of shares between spouses will not incur tax.
Evaluate Liabilities: The corporation’s debts and liabilities must be considered when dividing its value.
Assess Future Income Potential: The future income generated by the corporation may impact spousal and child support calculations.
Dividing a corporation can be complex, and it is advisable to consult with a family lawyer and financial professionals to ensure a fair division and to address all financial and legal aspects of the process.
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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.