Own a business and getting divorced? Beware of common mistakes

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Splitting up a couple’s property in a divorce can be tricky and contentious. But when either or both spouses own a business, it can take things to another level, making the process of untangling debts and assets even more complicated.

There are also a lot of mistakes that business owners tend to make when going through a divorce, which can only make matters worse. Here’s a primer on some of the most common ones to avoid:

Not having a prenuptial agreement

Nobody goes into a marriage thinking it’s going to fail. So the idea of entering into a prenuptial agreement is anathema to many people.

But that’s the wrong way to think about it. A prenup is a smart way to give yourself security and predictability just in case things don’t work out.

Most states will allow you to designate your business as “separate property” not subject to division in a divorce. In some instances, you may even be able to designate a future business that hasn’t gotten off the ground as “separate property.” You can even include instructions for how the business will be appraised.

And if you didn’t enter a prenup, it’s not necessarily too late. If your spouse is willing to consider it at this point, you can put the same provisions into a postnuptial agreement.

Improperly valuing the business

Even before a divorce appears on the horizon, you should know what your business is worth. To do this, you need a proper business valuation conducted by a professional business appraiser.

It’s important to note that appraisers can use a variety of formulas to value a business. They might focus on income, they might focus on fair market value, or they might focus on assets. It’s a good idea to check in with a family lawyer to discuss which approach is best, but you do want to make sure that however the business is valued, you’re taking into account the business’s future outlook and not just its current worth. This reduces the risk of you receiving too little in the settlement.

Poor financial recordkeeping

You simply can’t have your business valued properly if you don’t have accurate and up-to-date financial records. And a divorce judge will have a tough time entering orders that protect your business if your records aren’t clear, no matter how big or small your business is.

Commingling business and personal funds

One of the most important steps you can take as a business owner is keeping your personal and business funds and expenses separate. This means if you have a credit card or a separate bank account for your business, you should not use it for personal expenses and vice versa.

By mixing up your finances, you’re making it a lot harder to value your business properly and get a fair and reasonable property settlement. If you’re in the habit of commingling your finances, now is a good time to divide your personal life from your professional life and even gather, organize and review your records with a family law attorney.

Hiding personal expenses in your business

If you’re like a lot of business owners, you might be tempted to write off certain personal expenses as business expenses for tax purposes. You may even use your business to cover all your personal expenses.

If you do this, however, you run the risk of a divorce judge attributing additional “deemed income” to you, which could result in higher child support or alimony payments.

This is just the tip of the iceberg. If you want to learn about other mistakes you could be making, call a local family law attorney today.

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