Top 5 Mistakes Business Owners Make In Divorce
Texas business-owners, whether just beginning the divorce process or in the midst of active divorce litigation, have special circumstances they must consider to protect their valuable asset.
Top 5 Mistakes Business Owners Make In Divorce:
- Intermingling personal and business funds
Texas is a community property state, which means all income is deemed community property. Certain financials obligations stemming from the divorce – division of property, child support, spousal maintenance – will be calculated based on net income. This does not mean the business’s gross income or contractual values. By comingling the business and personal funds (not having separate bank accounts or transfers from business to personal accounts) this will complicate the divorce process. Keep your business funds in a separate account, even if you are a small business or have a small side-business in addition to your regular job. It will make the divorce much easier.
- Hiding personal expenses in the business
Many business owners have the right to write off certain expenses as business expenses. Cellphones, fuel, even a portion of a mortgage may be an IRS-approved business expense. In our experience, we have seen a lot of Texas business owners who have used their legitimate business to cover ALL expenses. This is a tax-concern but also a concern for divorce purposes. Using your business to cover all expenses can result in additional “deemed income” for you, which could result in superficially inflating your income for child support or other support calculations.
- Failing to get a business valuation
If a business was created after a marriage was formed, it is considered community property and subject to a division of property during the divorce. Even the smallest of businesses have value and all Texas businesses should be appraised and valued by an experienced business valuation professional. Absent a business valuation, the parties will each have the opportunity to give their estimate of the company’s value. It’s possible all parties will agree on the value, but what if they don’t? The Court could agree with one party’s estimation (whether it is too high or too low), which will result in the division of property being superficially skewed. One party may get less of the community estate because of an overestimated business valuation. It’s vital that the business be properly valued for a just and right division of property to be effectuated.
- Letting the divorce destroy your business
Many Texas businesses are jointly owned and managed by married couples. Even if not jointly managed, both spouses may have some sort of financial control over the company. As one can imagine, this can result in chaos when the parties stop cooperating and are at each other’s throats, both legally and emotionally.
The best way to approach this conundrum is to initiate swift legal action. A Texas family law court can issue temporary injunctions or a Temporary Order may be rendered which outlines how the business should continue to operate. These legal tools can prevent a party from damaging the business financially or professionally and ensure the business continues on throughout the divorce proceedings.
- Keeping poor financial records
A common bond between all of the above concerns can be attributed to failing to keep accurate and up to date financial records. You cannot get a proper business valuation without solid financial records. A Texas business owner will have a hard time determining their personal income from a business if the accounts are comingled. A Texas divorce court may have a hard time entering Temporary Orders for a business’s protection if the records are unclear. Even the smallest of businesses should keep organized and extensive financial records. If unable to do so themselves, a Texas business owner should recognize their shortfall and look for outside help in keeping financial records.
As unfair as it may be, there is an extra burden on Texas business owners during a divorce. They have to present a legal case for themselves as well as their business. If business owners follow the above advice and avoid the Top 5 Mistakes Business Owners Make In Divorce, it will be easier for their legal team to vigorously advocate for the business owner’s legal rights and goals. If you are a Texas business owner contemplating a divorce or embarking on the divorce process, please contact our team at the Ramos Law Group. We have represented Texans who run massive corporations to the neighborhood lawn guy. We can help! Call us at (713) 225-6200.