If you are a business owner considering marriage, understanding how to protect your business assets before marriage is an important part of financial planning. A marriage breakdown can have a significant impact on business interests. There are various ways to structure those protections ahead of time. No one goes into a marriage expecting it to end, but knowing your options now can prevent serious disruption later.
Key takeaways
Why Protecting Business Assets Before Marriage Matters
Under the Family Law Act, business interests held by either spouse will generally be included in a property settlement along with jointly owned property. Property owned before the marriage, including business interests, may be considered an initial contribution. Premarital assets may have an impact if the marriage was short. However, initial contributions carry less weight in longer marriages. If a business forms part of the marital property pool at the time of settlement, it will likely be included in proceedings.
A common myth is that business ownership will shield those assets. Ownership alone does not necessarily protect those interests. Even if your former partner had no direct input into the business, they may still have a claim.
It is also worth noting that getting married does not automatically change who owns your home or business assets. Any changes to a title deed or mortgage require action by the owners themselves. However, the length of the relationship and how assets are used during it,for example, if a family home was the primary residence — can significantly affect how the Court treats those assets in a settlement.
Potential consequences for business owners
There are various ways that a business can be impacted during property proceedings:
Forced asset liquidation. The Court may find that your spouse has a claim on your business assets as part of the property division. You might be required to liquidate some assets to fund that settlement.
Pressure on cash flows. Some settlements may result in a significant transfer of assets. A large payout to a former spouse could meaningfully impact a business’s cash flow.
Disruptions to business operations. A lengthy and complex divorce process can divert attention away from the business itself, with meaningful operational consequences.
How Does Australian Family Law Approach Asset Pools?
If property matters are handled through a court order, the Court will apply a four-step process to determine an appropriate division. Those steps are as follows:
Identification and valuation of the property pool. The parties have to fully disclose their financial positions. This includes providing documentation on assets and liabilities, such as:
Business interests.
Stock portfolios.
Income streams.
Credit card debts.
Mortgages.
Real estate.
Superannuation.
Looking at each party’s contributions to the marriage. The Court considers each party’s financial and non-financial contributions.
Considering the current and future circumstances of the parties. One spouse may be more financially vulnerable than the other. Adjustments may be made to reflect each party’s circumstances, including age, health, income capacity, and the care of children.
Deciding whether the proposed division is just and equitable. The Court will make a final determination about whether the order provides an equitable outcome for both parties.
The Federal Circuit and Family Court of Australia (FCFCOA) has considerable discretion to determine what constitutes a just and equitable division. This can make outcomes difficult to predict, which is why making arrangements early is particularly important.
Legal Tools and Agreements for Asset Protection
Now that we have considered why protections matter for your business, what are your options? Here are some of the common methods you can implement.
Binding financial agreement
Binding financial agreements (BFAs) can be an effective way to protect your business assets before marriage. They are available to married couples, and since 2009, people in a de facto relationship can also use them. One of the key aspects of a BFA is that you can enter one before, during, or after a marriage. This contrasts with property orders, which require the parties to be separated.
BFAs allow parties to be very precise about how they want specific assets to be handled. A BFA can be used to exclude pre-marital assets, future inheritances, or business interests from the shared asset pool in the event of separation. Unlike verbal agreements, which are not legally binding under the Family Law Act, a properly prepared BFA provides certainty for both parties.
Legal requirements
There are a few criteria that a BFA has to meet to be legally binding:
The agreement must be in writing and signed by both parties.
Each party must receive independent legal advice from their own separate lawyer before signing.
Each lawyer must provide a signed statement confirming that advice was given, and a copy of that statement must be provided to the other party.
Both parties must have entered into the agreement voluntarily.
Trusts and legal structuring
There are different legal structures that business owners can use to provide an added layer of protection to their assets. One of the key benefits these structures offer is creating a separation between business and personal assets. Here are some options.
Discretionary trusts
Whether discretionary trusts constitute property for the purposes of a property settlement has been litigated several times in the Australian courts. In Kennon v Spry [2008] HCA 56, the High Court considered when discretionary trust assets may form part of the property pool. Courts look closely at who controls the trust and whether a party benefits from it. However, the analysis is contextual — trust assets that fall short of being classified as ‘property’ may still be treated as a financial resource, which can influence the overall outcome. A lawyer can advise on how a specific trust structure is likely to be assessed.
If a party cannot be shown to have sufficient control of the trust, its assets may be treated as financial resources rather than property. Financial resources are assets expected to provide a future benefit to a party, but which do not currently belong to them.
Company structures
Many people treat ‘business’ and ‘company’ as interchangeable concepts. However, a company is a distinct type of business structure with specific legal implications. Incorporating as a company creates a business entity that is separate from its shareholders and directors. This means the business’s assets are technically owned by the company, not by an individual.
This may mean that a former partner’s claim is limited to the value of the business owner’s interest in the company as a shareholder. In practice, this could result in an adjustment elsewhere in the property pool rather than against the business’s underlying assets.
The importance of control
The Court is alert to the use of legal technicalities to effectively conceal assets. What the Court is really focused on is who controls the assets. For example, even if you are not the trustee of a discretionary trust, you may have appointed them and continue to direct their decisions.
In the case of a company structure, the Court will look at factors such as:
Whether the party is the sole director or shareholder.
Whether the party has effective control over the company’s business decisions.
Practical Steps to Safeguard Business Assets
There are some sensible steps you can take to help keep your business safe from settlement claims.
Keep business and personal assets separate
Make it clear that your business and personal assets are separate property. Some things you can do include:
Maintain separate bank accounts.
Keep clear records of income and expenses.
Do not use business funds for personal use.
Consider interim court orders if needed
If separation occurs and you are concerned about asset dissipation, you may be able to apply for a court order to prevent your partner from accessing business bank accounts or selling business assets while proceedings are underway. Acting promptly is important — a family lawyer can advise on the steps to take.
Get an accurate business valuation and audit
It is important to have an accurate business valuation, particularly if you have entered into a BFA. This helps distinguish between contributions to the business made before and after the relationship. It can also play a part in negotiations if there is a dispute.
Make sure you have insurance
Insurance can play a helpful role in protection planning. When a business faces financial pressures, insurance coverage can provide liquidity to prevent asset sales. Here are some policies worth considering:
Key person insurance. This provides protection in the event that the business loses someone crucial to its success.
Income protection insurance. This can be critical if there are disruptions to business operations.
Business expenses insurance. This coverage ensures that fixed business expenses are still met if you are unable to work.
Conclusion
Taking steps to protect your business assets before marriage is one of the most practical things a business owner can do. BFAs can be highly effective if drafted correctly. Legal structures such as discretionary trusts and company arrangements may provide additional protection, though the Court will always consider who actually controls the assets rather than simply who owns them on paper.
If you and your partner have already reached agreement about your property, there are two main ways to formalise it: you can apply to the Federal Circuit and Family Court of Australia for consent orders, or you can enter a Binding Financial Agreement. A lawyer can advise which approach suits your circumstances. Note that if you have been divorced, you generally have 12 months from the date the divorce order takes effect to apply for property settlement — so it is worth seeking advice promptly.
Speak to a family lawyer
If you are a business owner seeking legal advice on protecting your assets, contact us today to discuss how we can help.
