The final part of a 3 part series covering partnerships.
How are shares in a professional partnership practice such as a law firm, accountancy practice and architect practice, dealt with on divorce or dissolution?
Read a reminder of the general principles applicable to a financial settlement involving a partnership share.
Below are some additional issues to consider when dealing with a professional partnership:
How to approach a valuation of your partnership interest
- Equitable distribution: your share of the partnership is a resource and may need to be appraised and valued, as this will play a role in how assets are divided. Learn more about business valuations on divorce or dissolution
- Goodwill: the value of professional goodwill (your reputation, clientele, etc.) may be factored into the valuation of your partnership interest. Some partnership agreements exclude goodwill in valuing any partnership shares
- Buyout: some partnerships require buyouts if a partner’s interest is to be divided, which could require negotiations with your spouse and the partnership itself.
Impact on your income
- Maintenance obligations: your professional income will be assessed and considered when determining an appropriate level of child support and possibly spousal maintenance payments.
- Future earning capacity: your sustainable future income may also be considered, especially if it is reasonable to expect growth in your income
- Income Fluctuations: if your income as a partner fluctuates (due to profits or business cycles) you should consider how this might affect spousal maintenance or child maintenance agreements.
Terms of the partnership agreement
- Partnership restrictions: review your partnership agreement carefully. Some partnerships have clauses about what happens in the event of a divorce. There may be limitations on transferring partnership interests or involvement of third parties (your spouse) in ownership. See our article on protecting your business from a future divorce
- Consent of other partners: some partnership agreements require the consent of other partners before shares or ownership interests can be transferred to a spouse or bought out
- Non-competition clauses: these can limit your ability to work in your field after divorce, affecting both your earning capacity and the valuation of your partnership interest.
Confidentiality and privacy vs disclosure obligations
- Client confidentiality: divorce proceedings could bring scrutiny to your financial records. Ensure client confidentiality is preserved and that sensitive information about your professional practice is handled securely
- Partnership financials: your spouse’s legal team may request access to your partnership’s financial documents. Work with your legal team to protect sensitive business information and limit unnecessary exposure
- Note that it is possible that all of the partnership’s assets have to be disclosed in the taking of a partnership account for other purposes arising from a separate partnership dispute that may result in litigation
- Disclosure: the following key documents typically needs to be disclosed to ensure a clear assessment of your financial situation:
- partnership agreement
- financial statements
- tax returns (both personal and partnership)
- capital account statements
- compensation records
- retirement plans
- deferred compensation agreements
- loan agreements or debt statements.
Retirement and deferred compensation
- Partnership pensions or retirement plans: if your partnership has retirement plans or deferred compensation schemes (such as a profit-sharing plan), those assets could be subject to division. They will need to be disclosed
- Valuation of future benefits: these assets may need to be valued based on their potential future payout, which could be complicated by the structure of your partnership’s financial plans.
Tax implications
- Capital gains or other tax liabilities: dividing partnership interests or other assets could trigger capital gains taxes or other tax liabilities. Ensure any financial settlements or buyouts take this into account
- Impact on partnership distributions: if you are forced to sell or liquidate assets to fund a divorce settlement, consider the tax consequences of doing so.
Post-divorce planning
- Impact on client relationships: divorce can impact how clients perceive you, especially in small or closely-held partnerships. Maintain professional boundaries and manage any reputation risk
- Rebuilding your finances: after the divorce, you may need to restructure your finances, especially if a significant portion of your partnership income is allocated toward maintenance payments.
Legal representation
- Specialised legal team: engage a family solicitor experienced with complex business and partnership issues. You may also need to consult a forensic accountant for valuation purposes
- Mediation and negotiation: Negotiate commercially. Consider mediation if you and your spouse want to avoid court, particularly when dealing with business interests. Learn more about mediating conflicts in family businesses
- Avoid media attention: Increasing reporting provision in the family court for journalists and legal bloggers is a major consideration. Non-court options to resolve a dispute need to be carefully considered with your legal team. Learn more about the media and transparency in the Family Court
Other issues
During the course of the divorce or dissolution proceedings, other issues for the partnership may arise which need to be factored into the solution.
Some common issues relating to solicitor’s practices are explored in more detail here:
For more advice on the topics in this insight contact our expert divorce and separation solicitors.
