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You may be wondering what starting a new business during divorce is like. If you, and possibly your business partners, are considering starting a business or partnership during your divorce, it’s essential to utilize the services of an attorney that specializes in both business and divorce.
Businesses can either be considered an asset distributable in divorce or a source of income for the payment of support, or both, depending on the facts and circumstances of your situation. Starting a new business during divorce can be complicated, but the critical distinction to determine is: is the business an asset of the marriage?
In New Jersey, all assets (including businesses) legally and equitably acquired during the marriage (between the date of marriage and the date someone files for divorce) is subject to equitable distribution in the divorce. N.J.S.A. 2A:34-23.1.
If you had a business before you or your spouse file for divorce, on its face, that business would not be subject to equitable distribution according to the statute. That doesn’t always hold true, however. And, starting a new business during your divorce can also raise issues that are best handled by an experienced divorce attorney.
If you have a concern that your marriage may not survive, there are 7 steps you can take to protect your pre-marital business in divorce.
- Maintain good records and keep the family finances separate from those of the business. Don’t borrow out of the house account to buy a company truck or start a new business during your divorce. Don’t use company revenue to pay for personal expenses (meals, cell phones, vacations).
- Pay yourself a rational salary. If you starve the family’s cash flow to build the business, a lawyer might later make the case that your ex is entitled to more of the company’s assets. If you paid yourself $80,000 a year instead of $300,000 and were hoping on retirement to sell the business and enjoy the proceeds together and now that’s not happening, then your ex will want [his or her] share of the company.
- Fire your spouse. If your spouse is actively involved in your business, ease him or her out as soon as possible. The more prominent the ex’s role and the longer he or she worked in the business, the stronger the case a lawyer could make that this spouse helped build the enterprise and should profit from its growth.
- Sacrifice other assets. In a divorce settlement, a couple’s total assets are added up and then divided. Try to retain 100 percent ownership of the business by forfeiting other assets instead, such as retirement accounts, the family’s home, vehicles or collectibles.
- Get a fair valuation. Use a neutral, court-appointed valuation professional and then arrange for another outside party to review the figure before you agree to it.
- Arrange to make payments over time. It’s common to pay an ex for a share of a business gradually. The monthly payments can come from the business’s cash flow or a bank loan.
- Raise capital by selling a stake. You could sell a minority stake in your business to employees through an employee stock ownership plan. Or find an angel investor or two who will pay cash in exchange for an ownership stake.
What Happens if I Start a New Business During My Divorce?
If you are starting a new business during your divorce, first, your attorney has to help you determine if the business is really an asset of the marriage or only a source of income. Businesses can be both.
If you run a small, family business with few or no employees, no equipment, inventory, or long-term contracts, then the business would most likely be considered only a source of income for purposes of determining support.
For example, an LLC formed by a professional business consultant that works from home, has no long-term contracts with clients, might be considered only a source of income not an asset of the marriage. This is not always true, and much depends on the facts. On the other hand, a professional practice like that of lawyers or doctors are usually considered assets subject to distribution in divorce as well as a source of income.
Starting a Business Before Your Divorce is Final
You start from the general rule that assets acquired (or businesses started) before the date of filing for divorce are subject to equitable distribution. Therefore, in most cases, new businesses started during a divorce would not be subject to equitable distribution. If however, you use marital income or assets to finance the start-up of your business, then you have essentially commingled marital money with an exempt asset and made that asset in play for distribution in divorce.
How businesses get divided in divorce is very complicated, and may rely on whether the business is started before marriage, during the marriage, or after someone files for divorce but before the divorce is final.
Don’t leave your future to chance. We can help you answer the question, “What happens if I start a business before my divorce is final?” Give us a call today to learn your rights if you are considering starting a new business during divorce.
