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What happens to the family business after the divorce?

Business Law
What happens to the family business after the divorce?

The fate of the family business after divorce depends on many factors. Most of them come into play long before the breakup (even before you get married). That is why it is key to seek specialized legal advice before mixing family and business.

In our article today we are going to analyze some of these factors, although a solid answer cannot be given to the question "what happens to the family business after the divorce?" without making a detailed analysis of the specific case.

We will take the opportunity to offer some preventive advice. And it is that the best way to minimize the conflicts that arise in the division of the business when divorcing is through previous solutions.

Warning: recommendations for freelancers and entrepreneurs who are going to get married 

Although we will go into the issue in detail shortly, we must warn from the outset that one of the most important factors in determining the fate of a business after a divorce is the applicable matrimonial property regime.

The Spanish Civil Code (CC), grants wide freedom to the spouses to regulate their economic relationships, but the truth is that one of the following systems is usually used:

  • Separation of property regime. Maintains the assets of both spouses separate, although subject to certain family protection duties.
  • Profit regime. Difference between the assets of each spouse and those of the marriage itself. Broadly speaking, each spouse keeps as private what he had before marrying. What either of them will earn during the marriage (although there are exceptions, see art. 1346 CC) corresponds to the community of community property. In the event of termination of such a company (for example, by separation or divorce), it must be liquidated and distributed equally.

As can be seen, the distribution of the family business will be more complex in cases where the marriage was married in community. Issue that is aggravated if we take into account that this is the regime that is applied by default in most of the Autonomous Communities.

Hence, it is essential to take certain precautions when getting married if we are self-employed or entrepreneurs, as well as when founding family businesses.

The Pre-nuptial agreement

Through marriage agreements, the spouses can regulate their financial relationships. Thus, they could agree that instead of the community property regime, the property separation regime would be applied.

But this instrument is not only used to select one or another legal regime. It can actually be as precise as the spouses need. In fact, in the case of family businesses it is common to introduce clauses such as:

  • Marriage referential adjudication. It allows to anticipate the distribution of goods at the time of liquidation. For example, if the joint property partnership had to be liquidated after a divorce, this pact could determine that the employer spouse retains the business in exchange for financially compensating the other.
  • Succession significance. It allows to anticipate the improvements of the inheritance. For example, reserving a higher stake in the company for one or more of the children.

It is important to note that capitulations can be granted before marriage or during its term. Therefore, nothing prevents using them just before founding a family business with the spouses already married.

In any case, it is more than advisable to grant capitulations if the marriage is going to enter into a common business or one of the spouses has a business project. Thanks to this pact, problems will be avoided in the event of a breach, providing the company with greater legal security.

Company protocols

Without going deeply into the concept, company protocols are pacts applicable to family businesses, useful for regulating details internally. For example, they may define a corporate culture or requirements to enter or leave society, form their will, or occupy certain functions.

In the event of the establishment of a family business, it is advisable to use these protocols, as they will make it possible to avoid part of the conflict in the event of a separation or divorce. In fact, its objective is to provide stability to a family economic project, preventing the initial objective from being dispersed with the entry of new members or the departure (divorces, separations, deaths…) of the previous ones.

If people outside the family also participate in the company or, being family members, it has a more open character, nothing prevents protecting its continuity with other types of instruments or shareholders' agreements.

Other cautions

As we will see below, two of the most relevant factors in the fate of the family business after the divorce are the applicable matrimonial property regime and the origin of the business funds. So, it is important to seek the advice of specialists before making any input.

For example, the jurisprudence understands that in marriages under the community regime, any contribution is community contribution unless the spouse who makes it reserves a right of reimbursement or expressly declares its exclusive nature. Failure to document these extremes could cause the contribution to be considered free and complicate the proof of its proprietary nature and even frustrate the right to recover the contribution.

Factors that come into play in the fate of the family business after divorce

If the above recommendations have been followed, the most important factor in determining the fate of the family business after divorce will be the marriage dissolution procedure followed:

  • In the case of consensual divorces, there should be no major problem. The patrimonies of each will be clearly delimited, especially in the event that the separation of assets governs.
  • In the case of contentious divorces, the Judge will have the last word. But the spouses will have enough material to prove the destination that each good should receive. 

Once the terms of the distribution have been delimited (if there is one), the former spouses may choose to continue the operation of the business or to liquidate it or transfer it and distribute the price obtained proportionally.

However, if the marriage or the employer spouse has not been careful in regulating the situation of the company, other factors will have to be addressed.

The matrimonial property regime

When the marriage is governed by the separation of property regime, the company will remain in the power of its owner. This is without prejudice to the fact that you must compensate your former spouse in some way. For example, compensation could be imposed or the burden that the use of the family home is attributed to the other spouse on a temporary basis. But in principle, these compensations will not affect the company nor do they have anything to do with the economic activity itself.

In the event that the property regime governs, the nature of the company will have to be analyzed. If it is a property, it must be divided into halves. In any case, the benefits of its exploitation until the moment of the divorce will correspond to the joint property partnership and, therefore, to both spouses equally.

The nature of the contributions 

In the event that the marriage is celebrated in a community property regime, the key to the destiny of the company will lie in its community or proprietary nature.

  • Broadly speaking, the company will be exclusive if it already belonged to one of the spouses at the time the economic regime began.
  • However, it will be community property if it was founded during the life of the community property at the expense of common property.
  • It may also happen that it was founded during the validity of the marriage with private and common assets, in which case the company will correspond proportionally to its contribution to the founding spouse and the company.

At the time of dissolution of the economic regime, the company must be divided as follows:

  • Each spouse will receive the proportion proportional to their private contribution.
  • And both spouses will share in equal parts the proportional part to the contribution of the community property.

This implies that in order to keep their business, the entrepreneur or self-employed spouse will have to compensate the other for the contributions made by this or the company. Compensation that, depending on the legal form and situation of the company, can be in the form of shares or economic consideration.

Having said the above, we must not forget that each case and its circumstances must be analyzed separately.

Contact us, and our lawyers specializing in business law will study your specific case. 

At Forcam Abogados we have offices in Barcelona, Madrid and Reus.