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Why is a competitive salary critical for business owners in divorce?

On Behalf of | Oct 23, 2020 | Divorce

When facing a divorce, business owners have a lot on their minds. They worry about how much time they will have with their children, and what will happen to the family home. Even so, one of the biggest worries on their mind is what happens to their business.

Under Maryland law, one spouse’s business is often subject to property division – if there is no prenuptial agreement in place. However, there are proactive steps that business owners can take to protect their business and business assets during the divorce – namely, paying themselves a competitive salary.

Why is a competitive salary important?

There are several circumstances where business owners might not pay themselves competitively, at least for a period. It is a common practice when paying off business debts to allocate some income towards the debt.

However, divorce and family courts do not often see it that way. Underpaying oneself could be perceived as a form of hiding assets.

Therefore, there are two reasons a competitive salary is so critical, especially in a divorce:

  1. Spouse’s income plays a large role in not only the property division process, but also the calculation of spousal support and child support.
  2. Because of this, the business owner’s spouse could claim an increased amount in spousal support or more assets in equitable distribution if the owning spouse underpaid themselves.

Business owners should pay themselves fairly long before they consider pursuing a divorce, so they can avoid these complex issues.

Careful documentation is essential

Even if Maryland business owners pay themselves a competitive salary, they must still ensure they maintain an organized record of all the financial aspects of their business, including:

  • All transactions
  • Pay stubs
  • Tax returns
  • Business debts

Keeping a record of these financial matters can provide critical proof to protect one’s business, assets and finances during the divorce proceedings.