What Business Owners Need to Know About Retained Earnings and Divorce
The term ‘retained earnings’ refers to the net income earned by a company that is left in the business, instead of being paid out to the shareholders. When a business owner goes through a divorce, retained earnings, a seemingly esoteric and dry accounting matter, can become a fiercely disputed family law issue. In fact, how a business owner’s retained earnings are handled can have a major impact on several different aspects of family law, including child support, spousal support and property distribution. In this post, we discuss the basics of retained earnings and Florida divorce.
Corporate Assets vs. Marital Property
Florida is an equitable distribution state. Under state law, marital assets are divided in a manner that is deemed to be fair to each party. Earnings that are retained by a business are generally considered to be corporate assets. Thus, they are not marital assets, at least directly. While your business interests may potentially be a marital asset, the earnings that are retained are not necessarily personal. This is a very important distinction because earnings that can be left in a business are not directly subject to equitable distribution.
Businesses Need to Pay the Bills
To operate effectively, businesses need to be able to retain earnings. Investments may need to be made, debts may need to be paid off, and the day-to-day operating expenses need to be covered. Business owners have a right to leave money in their business. In fact, under Florida law, business owners are actually forbidden from taking any distributions if the business cannot pay its bills. In general, it is considered to be standard practice for a business to retain earnings so that it has the cash on hand to pay for between three and six months of operating expenses.
Retained Earnings Cannot Be Used to Shield Assets
While business owners and operators are given wide latitude to manage their company how they see fit, Florida business owners are prohibited from using retained earnings to shield their assets in a family law case. Should a Florida court determine that a business owner is retaining earnings for the purposes of concealing income, action can be taken to rectify the issue. Indeed, courts could force payment. Many family law disputes arise over allegations that one party is concealing income in their business. These cases often lead to intense disputes, partially because business finances are such a complicated issue. If you are involved in a family law dispute over retained earnings, your attorney may need to bring in an expert accountant to conduct a detailed analysis of all financial statements and records.
Contact Our Orlando Office Today
At the Law Offices of Steve W. Marsee, P.A., our Orlando divorce lawyer has extensive experience handling complex divorce cases. If you are a Florida business owner going through a divorce, we can help. To set up your fully confidential legal consultation, please call us today at 407-521-7171 or email us directly through our website. We represent clients throughout Central Florida.