5 Divorce Mistakes Business Owners Commonly Make
Small and family-owned businesses are the backbone of the U.S. economy. According to data from the U.S. Census Bureau’s Annual Business Survey, more than 35% of Washington businesses are spouse- or family-owned. Coupling this statistic coupled with the number of divorces that occur annually, companies and their owners are often impacted when a marriage ends.
Unraveling debts and assets can be tricky in any divorce. The process becomes exponentially more complicated when one or both spouses are business owners. Avoiding the following mistakes can protect businesses and individuals before, during, and after divorce.
Mistake #1: Assuming a Divorce Won’t Happen
People do not purchase long-term disability insurance because they assume they will get injured or suffer from a debilitating illness. They buy the insurance knowing such an event is in the realm of possibility. They want to be prepared.
A prenuptial agreement should be viewed in the same way. Having this legal document does not doom a marriage to fail. The contract does include valuable protections in many areas should the union end. Prenuptial agreements can designate a current or future business as separate property. How a business is appraised and provisions for one spouse buying out the other can also be included.
The agreement can be constructed in any manner the two parties agree (as long as it does not violate the law). A postnuptial agreement can accomplish the same objectives after people say their I-dos.
Mistake #2: Commingling Personal and Business Funds
Not only does commingling personal and business finances leave a person vulnerable to potential liability, but the practice also makes valuing a business extremely challenging. The business will be a consideration in property settlement negotiations or litigation. An erroneous valuation will lead to a flawed property settlement. Examples of commingling are using your business credit card to buy clothes or using your personal checking account to pay a business vendor.
Mistake #3: Improperly Valuing the Business
Even if a divorce is not looming, a business owner should understand the value of their business. A comprehensive business valuation is a must when a Washington state marriage implodes. Only by having an accurate evaluation can either party reach a fair property division settlement.
Business appraisers evaluate businesses based on income, market value, or assets. If a prenup does not specify which approach should be taken, speak with your divorce attorney about which is appropriate.
Owners often focus on the company’s current worth. This calculation is important, but the true value should include future growth and potential. Not accounting for the business’ outlook can leave one party receiving too much or too little in the divorce.
Mistake #4: Failing to Take a Consistent Salary
Drawing a regular salary from your business has multiple benefits. When looking through the lens of divorce, not taking a salary will artificially inflate the value of the business. A faulty valuation will leave one spouse needing to pay more than they should if the business is subject to division.
The salary needs to be consistent with market standards. Paying yourself $100,000 when the typical salary is double can open the door for your spouse to argue that the larger figure should be used for property division and spousal support. The spouse can also ask for a greater financial award in the divorce if they contributed to the business but were never paid.
Mistake #5: Taking the Easy Route
The divorce process can drag on for months and be mentally and physically exhausting. Frustrations and delays lead some to agree to an unfavorable settlement. They want to put the marriage behind them. This eagerness to move forward is understandable; however, your future solvency is worth sticking it out.
The right divorce lawyer can help shoulder those anxieties and explain the importance of every step. Taking the “band-aid” approach will not serve you best in the long run.
The team at McKinley Irvin has extensive experience in navigating divorces involving business ownership. Elements not found in a typical divorce must be investigated and evaluated.
Learn how you can protect your business interests in a divorce. Schedule a confidential consultation by contacting McKinley Irvin onlineor calling 206-397-0399.