In a divorce, all property acquired by either spouse during the marriage is subject to equitable distribution. This may include a stake in a business that you own yourself or with partners. Regardless of how the ownership is titled, a court may treat your business interest as marital property, which means that your spouse may be entitled to a share of the enterprise’s income and assets. This can potentially disrupt the operation and profitability of the business, particularly one that you run yourself.
The best way to protect your business from the possible consequences of divorce is to enter into a prenuptial or postnuptial agreement that spells out what share of the business, if any, your spouse may be entitled to if you break up.
Even if you don’t have a prenup or postnup, you can help lessen the impact of divorce on your business by taking steps to keep a clear distinction between your business and personal affairs. These actions are the most recommended :
- Create a business entity — You should incorporate your business or form an LLC. After formation, follow the formalities that your state requires of a business entity, such as appointing officers and issuing shares. Although not a complete shield against your spouse’s equitable claims, a corporate or LLC ownership structure serves to define the separate identity of your business interest, the time of its acquisition and the source of its funding.
- Keep business and personal finances separate — Avoid drawing on business assets to fund personal expenses. Neither should you use personal savings to finance business operations unless they are treated as legitimate, interest-carrying loans. The family home or other assets should not serve as collateral for debts of the business.
- Pay yourself a reasonable salary or dividend — Some business owners do not compensate themselves adequately, choosing instead to keep more of the profits in the company. This practice, while meant to improve the business’s bottom line, can also support a claim by your spouse that he or she was deprived of a rightful share of the income.
- Don’t treat your spouse as a co-owner — It is commonplace in a small business is for the owner’s spouse to play a managerial role, even if informally. This can be a basis for the spouse claiming an equitable stake. If your spouse performs any work for the business, treat them like any other employee. Pay them a salary or an hourly wage and keep records showing whether they are an employee or an independent contractor.
You don’t have to figure this all out by yourself. Consulting with an accountant, a tax professional and an experienced family law attorney can assist you in keeping your hard-earned business interests from being dissipated in case of divorce.
Dawson Family Law, PLCC has experience dealing with all issues relating to business ownership in divorce cases. Call my Sterling Heights office at 833-671-4445 or contact me online to set up a free consultation.