How partnerships are dealt with on divorce or civil partnership dissolution

Partnerships involve two or more individuals sharing ownership and responsibility for a business.

Unlike companies, partnerships do not issue shares and some partnerships may be structured to have unlimited liability.

In this series, we explore what a partnership is, and how it might be treated if a marriage or civil partnership ends.

What is a partnership?

Legislation dates back to 1890 for traditional partnerships (“Partnerships”) although more recent legislation in relation to limited liability partnerships (“LLPs” — see a little further below) was introduced in 2001.

Partnership law is based on principles of trust and mutual obligations. Partnerships have been used as one of the preferred vehicles for professional practices, including solicitors, accountants and other professional services providers.

Partnership principles

Professionals in business as partnerships have shared, joint, unlimited liability for each other's acts, and partners all owe each other duties to act in good faith. This is broadly a duty to treat each other honestly and not act unfairly or in a way which impacts negatively on some for the benefit of others.

Subject to any agreement to the contrary, all partners are entitled to share equally in the profits of the business.

Likewise, they also contribute equally towards its losses whether those are of a capital or income nature.

All partners have unlimited, joint and several liability for all debts of the partnership which means that each partner is responsible for not only some of the debts of the partnership but all of them.

Each partner has the right to take part in the management of the partnership with most decisions being made by majority decisions. Decisions outside the scope of day-to-day matters require unanimity.

It is not possible for one partner to expel another unless there is some effective mechanism which permits this. There needs to be express agreement on that point, ideally recorded in writing.

Partners can agree to alter the position, as set out in the Partnership Act 1890 and often do — it’s worth having a sound partnership agreement if you want to create a “customised” relationship.

Limited Liability Partnerships (LLPs)

In 2001 limited liability partnerships were introduced. They have a separate corporate existence in the same way that the company has a separate personality, whereas traditionally partnerships are a collection of individuals who share responsibility without a separate “partnership entity”.

The separate corporate entity offers protection to the individuals and practice within it, and is intended to offer limited, rather than unlimited, liability.  There is a similar default regime for LLPs to that in partnerships, but this can also be amended by agreement between the owners of the business.

Quasi-partnerships

A quasi-partnership is not a partnership in the legal sense. It is a company in the usual way, with its own corporate entity but it may be held to be a quasi-partnership if the business was formed on the basis of a close personal relationship between the shareholders.

Being a quasi-partnership would likely affect the valuation of a minority shareholding in the company.

Often (although subject to the opinion given by an expert valuer) the court will apply a discount to the valuation of a minority shareholding. However, if the company is treated as a ‘quasi-partnership’, the court may determine that as there is a close relationship between the shareholders, the minority shareholder would only sell their shares as part of an overall sale of the business. If so, its treatment for the purposes of valuation might be closer to how a partnership would be valued and no minority discount would be applied.

Governance documents

A well drafted partnership or LLP agreement will deal with things that happen in the event of dispute between partners. Typically, it will include provisions for arbitration in the event of dispute.

Partnership disputes

Sometimes disputes within a partnership lead to deadlock. Learn how this can affect a business.

In a partnership, unless agreed otherwise between the partners, an individual partner can, unilaterally, dissolve the partnership. The effect of a dissolution can mean that the business is forced to come to a stop.

Sometimes a dispute between the partners cannot be resolved, resulting in the partners becoming unable to remain in business together. If they are unable to agree a way forward to wind up their partnership or separate their business interests, the likelihood is that the court will have to become involved.

Valuations

On dissolution of a partnership, the partnership's assets and liabilities are subject to division, potentially affecting not only the partners, but also their spouses.

Depending on the structure, valuing partnership interests can be challenging, especially if there are disagreements over the business's worth or future prospects.  This may call for expert evidence which can add an unwanted layer of expense and complexity to an already fraught situation.

Employment issues

Although partners are not employees, and therefore do not have unfair dismissal rights, they do have the right not to be discriminated against on the grounds of some protected characteristics of which sex, race, disability are a few, as set out in the Equality Act 2010.

Learn more about employment-related partnership disputes.

Partnerships on divorce 

Having explored what a partnership is, we turn our attention to how a partnership is treated if a marriage or civil partnership ends.

On any divorce or dissolution, whether or not a partnership is involved, both parties are entitled to a fair and reasonable financial settlement.

How is a divorce settlement reached?

A ‘checklist’ of issues must be considered in every case and underpin the principles of any settlement.

They are set out in section 25 Matrimonial Causes Act 1925. They include:

• the income and earning capacity of both parties now and in the foreseeable future
• the financial needs, obligations and responsibilities of both parties now and in the foreseeable future
• the standard of living prior to relationship breakdown
• the age of the parties and duration of the marriage or civil partnership
• any mental or physical disability of either of the parties
• the contributions of the parties to the welfare of the family
• the conduct of the parties (in limited circumstances).

First consideration must be given to the welfare of any child under the age of 18.

For more about divorce settlements generally see Divorce Financial Settlement Solicitors | Weightmans

Valuations for divorce purposes

Not every business or partnership will necessitate a formal valuation on a divorce. For example, a partnership share that is simply an income stream is unlikely to give rise to the need for a valuation.

Issues to consider when assessing whether a partnership may need to be valued include where:

• there is a likelihood of the business being sold in the foreseeable future, perhaps where the partner is approaching retirement and looking at a buy-out
• the accounts show significant capital assets or where there is concern the capital may be undervalued such as land or property that may be based on historic purchase prices
• the accounts show sizeable profits and turnover or where there is a significant discrepancy between profit and the standard of living maintained by the parties
• if there are concerns relating to the liquidity of the business
• there are concerns of non-disclosure relating to the accounts which may not therefore provide the full picture.

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 
  • deffered compensation agreements
  • loan agreement 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
• Resolving disputes: Resolving conflict in businesses requires a nuanced approach that acknowledges the intricate interplay between family dynamics and business.A partnership or other business involving a family member is a unique entity, combining personal relationships with professional dynamics. The line between personal issues and business priorities can become blurred leading to conflict that, if left unresolved, may threaten both the family and the business itself.

Whether conflict arises from within the business, or the business becomes the potential casualty of a family, partnership or shareholder dispute, Weightmans can provide a swift, structured approach to navigating what can be some of the most delicate, complex and emotionally charged cases, fostering collaboration and communication.