Don’t Use Business Assets for Personal Purposes
If you own a business and find yourself in divorce court, expect your company’s assets and debts to become a focal point of the case. The flow of cash through the business, whether in the form of revenue, loans or anything else, will be put under the microscope by your spouse’s lawyer and by the judge.
As a business owner facing divorce, you should make every effort to keep your business and personal finances separate. Using business funds to pay personal expenses or vice versa makes it very difficult to protect company assets, which in turn could lead to an unsatisfying outcome in the property division phase of the case.
In some circumstances, business owners may find it necessary to use company assets in ways that aren’t for business purposes. One common example is a business owner using company assets as collateral for a personal loan, such as a home renovation or other large family expense. If this type of action is taken at any point during your business ownership tenure, make sure you clearly document where the proceeds of the loan went and how the loan was satisfied. Was it repaid with your personal funds or did the business repay any of it? It may even be advisable to ask your spouse agree in writing about how you will use the loan.
If you fail to document how the loan was repaid or you fail to get your spouse’s written agreement, you could find yourself in a tough position. Imagine that you borrow $400,000 personally, using your company’s assets as collateral. Now you are getting divorced. You argue that the loan should be paid off with marital assets because the loan was used for family expenses. Your spouse argues that the loan is your business debt and has nothing to do with her. The burden is now on you to trace the loan proceeds and show the court how the money was used. If you cannot provide adequate proof, you could find yourself saddled with the entire debt.
Tracing loan proceeds usually requires the hiring of a forensic accountant, at no small cost. And during the tracing process, the layers of your business and personal finances will need to be peeled back one by one, revealing potentially more problems that take more time to resolve.
It’s clear that keeping business and personal funds separate is the wise move for a business owner seeking to protect the business during divorce. But if you haven’t done so over the years, don’t despair. A good divorce lawyer can help you unravel the complexities.
The Long Island divorce attorneys at Bryan L. Salamone & Associates, P.C. have decades of experience representing business owners and the spouses of business owners in complex divorces. To arrange a free consultation with our team, please call 1.631.479.3839 or contact us online.