Starting a business, or growing an existing one, is a long-term process. Someone who recently started a small company may give up their salary to reinvest all of the capital earned in the business. Their focus is on the long-term success of the company, not their short-term financial comfort.
Other times, a spouse who may only play a support role at the company might do their job without pay to help keep operating costs as low as possible. Especially when someone has a spouse to help them cover basic expenses, they may feel confident foregoing income until the company achieves certain performance metrics. An entrepreneur or executive may find themselves facing divorce in part because of the financial and personal sacrifices that building a company required.
How can forgoing a salary potentially affect personal and business interests during divorce?
Reinvesting is a form of commingling
New Jersey has an equitable distribution approach to property division when people divorce. Simply put, the courts want to arrive at a fair solution for dividing marital property between the two spouses. What is fair depends in part on the assets, earning potential and separate property of the spouses.
When one spouse reinvested marital income in the business by forgoing a salary, that could theoretically lead to the business’s vulnerability in a divorce scenario even if it might otherwise be their separate property.
The use of marital income to invest in a company makes the business at least partially marital property. That is true regardless of whether the spouse making the concession is the one running the business or the one providing basic support services like answering phones or responding to client emails.
Deferred salaries can affect company finances
When discussing how to value the business and divide any marital portion of its equity in a divorce, spouses may need to consider outstanding business debts. A salary temporarily deferred to reinvest in the business might theoretically influence the value of the business in the event of a divorce.
The nature of the employment arrangements, the duration of the unpaid work and a variety of other factors may influence how much of an impact deferring salary payments might have on the business’s finances in a New Jersey divorce. Someone who reinvested in the company might be able to hold the business accountable for their unpaid wages or at least factor in the value of that unreceived income when deciding what to do with the business and other marital assets.
Deferred salaries are one of many complicating factors that can arise when navigating a divorce as a small business owner. Understanding state law and a company’s finances can put people in the best possible position as they prepare for a complex divorce.
