When Business Partners Separate or Divorce

This, unfortunately, comes up quite regularly as a question to our help desk so we thought an article on it might be handy.

This article is not intended to offer legal advice for specific situations and it also does not look at Relationship Property law.  It deals with the nuts and bolts of dealing with the business fallout of a relationship which is coming to an end.

If one partner is trading as a sole trader then there is no significant change.  The business keeps trading under the person and tax is filed in the normal way.

It becomes more problematic when the business is run as a company with both partners owning shares and/or being directors.  This can be even harder to manage if, as is quite common, one partner does more in the company than the other.  Often one partner holds the key relationships either with suppliers or customers which can make practical operations very difficult.

The first thing to do is to find out exactly what you are in relation to the company so head over to [Companies Office](https://companies-register.companiesoffice.govt.nz/) and search your company name.  This will show if you are a shareholder (owner) or a director, or both.

Where Both Spouses are Directors

As the name suggests, anyone listed as a director at Companies Office has equal rights:

  • To ‘direct’ the company in any way
  • Request information from service providers (such as information from the accountant) and;
  • Bind the company in any decision.

But you also have responsibilities which may be onerous such as the responsibility to trade solvently.  If you are the non-active participant in a business, you have to carefully consider how you want to handle your options.  Do you want to stay involved so you can be more in control? Or do you want to exit the business to reduce your personal exposure?

Anyone can resign their position at any time although the company must retain at least one director.  If you wish to remove a director, you must do so at a shareholder meeting and have (usually) 50% of the voting rights (shares). In the situation where the company is owned 50:50, this means there is no easy resolution and negotiation will be required.  If you own more or less than 50%, then your options are different.

Where Both Spouses Own Shares

Shareholders rights and responsibilities are much more restricted.

  • You have no responsibility for the day to day running of the company, or its management.
  • You are entitled to a share of the profit in proportion to your shareholding.

You can’t ask for information unless you suspect that your profit is not being paid out and then you can request an audit of the books. You are not an agent of the company and cannot make any decisions on behalf of the company.

Practical Solutions

The reality is that usually practical solutions are complicated by emotions at these times.  However, there are 3 practical steps you can take:

  1. Make sure that your shareholder current account accurately reflects the amount taken out by each shareholder.  This means that if the two shareholders have taken different amounts out of the company over time, that is reflected in the final buy out price.
  2. Have a shareholder agreement!  We say this all the time – the time you need one is when someone is trying to exit the business and by then it is often too late. But if you can have a frank conversation before the business starts about what happens if it ends, that can be very helpful.
  3. Get an independent valuation of the business if you can’t agree with the value.  In an ideal world, the business partners sit down, value the company and one will buy the other out at a fair valuation, or this is done via the Relationship Property agreement.  The company valuation can be prepared by independent valuers on both sides with an agreement to split the difference.

Stay calm, seek legal advice and work on a sensible way of valuing the company.

If you have concerns about what happens if your relationship breaks down, contact support@beany.com or your lawyer.

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