Protecting a Business in a Divorce

Chester, NY attorney advises on advanced planning for optimum protection

An interest in a family-owned or other closely held business can become a highly contested asset during a divorce. While one spouse might claim to be the sole owner of an enterprise, the other could claim an equitable interest. Courts tend to be sympathetic to spouses who’ve contributed to the success of a business and now claim they’re being denied financial rewards. At Meth Law Offices, PC in Chester, I regularly advise Orange County clients on how to protect their business interests in a divorce. The best practice is to take decisive steps during the marriage. How you’ve run your business and managed its income and expenses will be determining factors in deciding on how much of a share your spouse is due.

Defining business ownership through choice of entity

Business assets acquired during marriage become marital property to be divided according to the law of equitable distribution. To help protect those assets, you need to create a wall of separation between your business and personal property. If you are operating a business as a sole proprietorship — reporting income on your 1040 and using personal accounts to manage transactions — a court may see the business as akin to a partnership between you and your spouse. Creating a business entity, such as a corporation or an LLC, can limit the amount of your ownership that is subject to division in the divorce.

Maintaining separate accounts can help protect a business

Once you’ve established a business entity, you can open accounts for that entity. Never use personal checks or a personal credit card to pay business expenses. If you need seed money or a line of credit from your household savings (or even from your personal take-home pay), make sure that amount is documented as an interest-paying loan to the company, that your spouse provides written consent and that provisions are made for repaying the borrowed funds.

Using a prenuptial agreement to protect a business from divorce

If you own a share of a business and are planning to get married, a prenuptial agreement can firmly establish that the business interest is your separate property. If you start a business during your marriage and it takes off, you might consider executing a postnuptial agreement to the same effect. However, even with a marital agreement, you must treat the business as your separate property. If your spouse participates in the business in any way and does not receive wages for work done, a court could find you’ve commingled the asset, and your spouse may claim an equitable interest. As a divorce lawyer in Chester, New York, I’ve had a great deal of experience in arguing against allegations of commingling of assets, including business ownership interests.

Using a trust to protect your business

Incorporating your business provides a degree of separation, but placing the business in a trust can further limit or prevent its treatment as marital property. A trust can be especially useful if you wish to have any of your children take over your business when you retire or pass away.

To learn more, contact a Chester, New York divorce lawyer for a free initial consultation

Meth Law Offices, PC helps clients set up protections for businesses in the event of divorce. I serve clients in Chester and throughout Orange County. Please call 845-610-6595 or contact me online for a free initial consultation.