Specialty tag(s): Divorce for Business Owners, Divorce
Jonathan James | January 9, 2024
When you own a business, it’s crucial that you establish a clear separation between your personal assets and your business assets. Failing to make the distinction between personal and business assets may work against you if, down the line, assets need to be divided, as is the case when business owners are faced with divorce. Business and personal assets and finances should also be kept separate for tax purposes; commingling assets can lead to legal troubles down the road. There are several important things that can be done to differentiate your personal assets from those of your business.
Getting an employer identification number (EIN) is the first step you can take to separate your business and personal finances. This nine-digit number is assigned to your company by the IRS to use for filing your business’s income tax return, submitting tax payments to the government, opening a business bank account, applying for a business credit card, and pretty much anything else that’s related to your business financially.
Once you have an EIN, you can set up your business as a separate legal entity such as an LLC or a corporation. This can formally establish your business as a legal entity that is separate from you as a person. An LLC allows you an extra layer of financial protection should your business suffer a financial setback. However, if you are married and planning to move separate property into a separate legal entity such as an LLC or corporation, it is important to consult with a family law attorney to ensure that transaction is completed properly; otherwise, you could inadvertently turn separate property into community property.
Understanding What Happens to an LLC in a Divorce
With an EIN, you’ll be able to open a separate business bank account to be used for bills, invoice payments, business expenses and purchases. With a business bank account started, you can also apply for a line of credit for your business and begin building up a credit history to help the business grow. This separate bank account is an important tool when you’re working to keep your business and personal accounts separate. The clear distinction between the two is vital for many reasons, not the least of which is the protection of your business in the event of a divorce.
Your fair value salary should be issued from your business bank account. This is the best way to maintain the boundary between business and personal accounts. Never dip into the business account for personal reasons: Just give yourself a regular paycheck and do all of your personal spending from that.
Create a system for tracking paper receipts, and digital receipts for your business. It may seem like a hassle to hang onto all of this documentation, but if you are ever audited by the IRS or if you need a business valuation during a court case, you’ll have all of your business receipts in one place.
Sometimes, you may use personal items for work, like using your car to go visit clients or talking to potential customers on your personal phone. You should always track when you do that so you can write off some of these expenses when tax season comes around. If you’re unsure of what counts, you should talk to a tax advisor who can help you to keep spotless records.
Jonathan James is a highly skilled litigator and negotiator in high-conflict legal situations and consistently receives praise from his former clients for his integrity, professionalism, and responsiveness. Jonathan is Board-Certified by the Texas Board of Legal Specialization in family law and is a member of the State Bar of Texas. Additionally, he is trained in Collaborative Divorce and has been named a Super Lawyers Rising Star, 2019-2022 and Best Lawyer 2020-2021 by The Best Lawyers in America.
To learn more about protecting your business in divorce, please contact Jonathan James at 214-974-3032.
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