Starting a Business Before Your Divorce is Final: What You Need to Know
Starting a new business is an exciting venture at any time in life. But if you’re in the midst of a divorce, you might be wondering how it might affect things.
Let’s start with a key point: There’s nothing to prevent you from starting a business now – in fact, Canadian divorce law is structured to help former spouses move on quickly with their separate lives – but there are a few legal and financial considerations to keep in mind.
The Impact of the Equalization Process
Under Ontario’s Family Law Act (FLA), the equalization of Net Family Property (NFP) will be a key part of the upcoming process of dividing your property for divorce purposes. The NFP is calculated as the difference between the value of your and your spouse’s property on the date of separation, as compared to its value on the date of marriage, excluding certain exceptions.
If you start a business prior to separation but before your divorce is finalized, any increase in its value between those two dates (i.e. separation date and divorce judgment date) may form part of your NFP. This means that even if it’s solely your new business, your spouse could have a claim to a portion of its increase in value – depending of course on the specifics of your case.
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Spousal and Child Support Considerations
Even if your divorce is not yet final, starting a business can also impact spousal and child support obligations. Under both the federal Divorce Act and the FLA, support payments are calculated based on your income as it stands currently (and in some scenarios, in the recent past).
If you’ve started a new business soon after separating and it is wildly successful, then this can be factored into your income; this in turn will impact your upcoming support obligations.
On the other hand, if your business is not yet profitable, your income will be relatively low. But Courts are mindful that divorcing people are tempted to minimize the appearance of success and artificially reduce their income, to lower any support that they must pay to a spouse or children. They will accordingly scrutinize your income closely, and even impute income if it looks like you are “cooking the books” on your new venture as a ploy to reduce your support obligations.
Related: Imputing Income – Determining the Proper Quantum of Child and Spousal Support
Disclosure Obligations
This brings us to the concept of “full and frank” financial disclosure. It’s one of the cornerstones of the Family justice system in Canada, and embodies the principle that you must make fulsome ongoing disclosure of your financial situation throughout your divorce process.
This includes completing a Financial Statement that is provided to your spouse and the Court, giving accurate details about all your debts and assets, including any businesses that you own or are involved in.
Filling this out accurately, and keeping it updated, is essential. If you have a new business and under-report what you are earning from it – or even fail to report its existence altogether – you could see the Court rectifying that lack of disclosure by making financial assumptions that are not in your favour. The Court might even decide to order costs against you.
Use Non-Marital Assets to Fund Your Business
On the topic of finances, make sure to document the source of investment funds you are using to get your entrepreneurship off the ground. Ideally, your funding will come entirely from outside sources that can be scrupulously documented, such as a post-separation loan that’s been taken out in your name alone.
But if you are thinking to fund your new business with money held in joint bank accounts or using other joint marital assets, this will likely lead to disputes when it comes time to calculate your respective NFP. Courts have broad discretion under the FLA to address such issues, and this could include making an order against you to compensate or reimburse your spouse for what is essentially a misappropriation of funds.
Practical Tips for Entrepreneurs During Divorce
- Consult a Divorce Lawyer Early
Before taking any steps to launch your business, consult an experienced Divorce Lawyer who can help you understand the potential legal implications. The lawyer can assist in structuring the business to minimize potential claims by your soon-to-be former spouse.
- Document the Date of Separation
The date of separation is a critical point in Ontario Family Law, since it is one of the key focal points of the property-valuation process. Ensure this date is agreed to between you and your spouse, and clearly documented. It will affect the valuation of assets, including your business, for the purpose of equalization.
- Maintain Clear Financial Records
Meticulous financial documentation is essential. Separate your personal and business finances from those of your spouse, and keep detailed records of all income, expenses, and investments related to your new business. This can help prevent disputes over whether the business is considered marital property under the FLA.
- Avoid Using Joint Assets
As mentioned above, avoid using joint marital funds or assets to start the business. Instead, consider using funds that have been clearly acquired post-separation or obtaining a loan in your name alone. Document these sources thoroughly.
- Document the Date of Separation
The date of separation is a critical point in Ontario Family Law, since it is one of the key focal points of the property-valuation process. Ensure this date is agreed to between you and your spouse, and clearly documented. It will affect the valuation of assets, including your business, for the purpose of equalization.
The Takeaway
If you’re considering starting a business before your divorce is final, consider contacting our firm for help in guiding you through the legal landscape, and help you make informed decisions.