You are a young entrepreneur who is about to get married. This is the most exciting time of your life and you obviously have no intention to ever get divorced, but you are wondering what would happen to your business if your marriage were to ever not work out. We are here to debunk all your questions and concerns. Fast answer: sign a marriage contract before marriage!
You are at the stage where your marriage is ending and want to know how you preserve and protect your business in order for it to sustain itself after your divorce is finalized, keep reading.
In Quebec, the articles of the Civil Code of Quebec and the Divorce Act govern married couples. Upon separation, divorce or death, you must proceed with the partition of the family patrimony, the partition of the matrimonial regime and assess whether either spouse owes one another spousal support.
Businesses are not part of the family patrimony; rather, business fall under your matrimonial regime you chose which will dictate, first, whether the business is divisible and, second, the terms and conditions of such partition, if applicable.
Quebec law provides for three matrimonial regimes: partnership of acquests, separation of property and community of property (which we will not address since it is an outdated regime).
Partnership of Acquests:
The Civil Code of Quebec provides that spouses who did not have a marriage contract before the celebration of their marriage will be governed by the regime of partnership of acquests. The partnership of acquests regime has therefore been the default matrimonial regime in Quebec since July 1, 1970.
A partnership of acquests creates two categories of property, namely those that are divisible/shared (acquests) and those that are not (private property).
Under the matrimonial regime of a partnership of acquests, a spouse’s business falls under the acquests category, which means that in the event of divorce, the value of the spouse’s share in the business will be divided equally between the spouses. Obviously, the determination of this value will depend on the legal organization of the business and will differ depending on whether it is, for example, a corporation or a sole proprietorship.
Some more examples of acquests include: the proceeds of a spouse’s work during the regime, the fruits and income due or collected from all that spouse’s private property or acquests during the regime, property acquired during the marriage, and a business acquired during marriage.
Some examples of private property include: property owned before the marriage, property which devolves to that spouse during the regime by succession or gift, that spouse’s clothing and personal papers, wedding ring, decorations and diplomas, and the instruments required for that spouse’s occupation, saving compensation where applicable.
Income derived from the operation of an enterprise that is the private property of either spouse remains that spouse’s private property, subject to compensation, if it is reinvested in the enterprise. However, no compensation is due if the investment was necessary in order to maintain the income of the enterprise.
Therefore, for your business not to be divisible under the partnership of acquests, it had to have been either acquired entirely before the marriage or given by gift or inheritance.
In order to determine the value of the business that is subject to be shared, we often hire an accounting firm to do a forensic evaluation of the company. Once we have a good understanding what the company is worth we are able to start creative negotiations to safeguard the company as much as possible. However in order to do that, there has to be liquidity from somewhere else, another source.
During a divorce settlement there are ways to try to protect the company as much as possible by compensating your spouse with unequal share (more generous share) for example of the family patrimony in order to leave the company intact.
Separation as to Property
The regime of separation as to property provides that each spouse has the administration of his or her property and may dispose of it as he or she wishes, regardless of when the property in question was acquired.
Thus, a business acquired during the marriage and owned by only one of the spouses would not be divisible under this regime. For entrepreneurs who choose this matrimonial regime, the value of the business should not be shared between the spouses at the time of the divorce. The effect is therefore the same as if the spouses had not been married.
To join the regime of separation as to property, the parties will have to sign a notarized marriage contract before the marriage or at any other time during the marriage.
WHAT ABOUT MY STATUS WITHIN THE BUSINESS?
A divorce does not affect the status of a spouse within the company. Thus, whether the spouse is a director, shareholder or employee, the end of the union does not entail the end of the business relationship. These issues will therefore have to be dealt with in parallel, in accordance with the applicable laws. It is therefore highly recommended that written contracts exist and be in force at the time of the divorce, whether it is a unanimous shareholder agreement, a partnership agreement or an employment contract.
It is worth noting that the Civil Code of Quebec has provided for a compensation mechanism when one spouse, by his or her contribution of property or services, has enriched the personal patrimony of the other spouse or his or her business.
For example, if your spouse has been responsible for the complete accounting and payroll services for the employees of your business for the past 10 years, without remuneration, this could give rise to a compensatory allowance.
Thus, spouses married under the matrimonial regime of separation of property will be able to use this mechanism to obtain compensation for the contribution that enriched the personal patrimony, including the other spouse’s business.
For any more questions or concerns, do not hesitate to reach out to our best divorce lawyers in Montreal!