4 Smart Ways to Protect Your Small Business in Divorce

If you are a small business owner going through divorce, it is common to feel protective of the business that you created.  After all, you have nurtured your business and watched it grow, much like a child.

If you started your business during the marriage, chances are it is a marital asset.  Therefore, under New Jersey’s law of “equitable distribution”, it is subject to being distributed between you and your spouse according to consideration of a number of “equitable” factors.  These  should be discussed with an attorney who is well experienced in divorce and family matters.

Depending on the nature of the business, the more your sole efforts contributed to an increase in its value, the more likely it would be for you to retain a larger percentage of  it in the divorce.

In the meantime, there are several actions you can take now to increase the chances of holding on to your business (or at least a larger percentage of its value):

1.      Schedule a meeting with a competent and reputable business accountant.  Ideally, you already have a longstanding relationship with such an accountant that you trust.  If not, obtain references from your attorney and others you know and trust.  As early as possible in the divorce process (and ideally before the divorce process begins), you should meet with your accountant to review the nature and amount of your business expenses and salary draws.

The amount of your salary draws should be reasonable.   If the salary you draw down is rather minimal, it is possible that your spouse could assert that the funds reinvested into the business belong to the marriage.  Likewise, make sure that expenses are reasonably necessary for the maintenance and growth of the business.

2.      Obtain an accurate value of the business.  Before determining the appropriate percentage, if any, of your business to which your spouse might be entitled, the value must first be determined by an accountant who specializes in valuing small or closely held businesses.  Your attorney will make the appropriate referral.

There is more than one method used to determine the value of a business and only the most appropriate method should be used in your matter.  Discuss with your attorney the most appropriate method for you.  For instance, if you don’t plan to sell the business anytime soon, chances are that fair market value would not be appropriate.

3.      Track the source of funds used to start and finance your business.  This is particularly important if the funds used were other than marital income or assets.  Be able to adequately document the sources.

4.      Go for win-win.  What are your spouse’s interests and goals for the future?  Perhaps there is an alternative marital asset that he or she would prefer to retain in the divorce, such as the marital residence, which could allow you to keep your business outright.  Likewise, if your spouse has any reasonably significant earning potential, perhaps he or she might agree that it would be far more cost effective for each of you to retain your own source of income – for you, this would be your business.

Knowing your options can serve as a powerful reminder that the law can be used as a guide for creating opportunities for a win-win resolution for both you and your spouse.

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