It can be difficult to tell when reinvested earnings become commingled community property, as divorce is always complicated by a business. Most businesses retain some of their earnings to drive growth opportunities over the near term and as cushion for a downturn. These assets can be crucial to the business’s functioning, but they can also be targeted during divorce, especially if there is reason to believe the business-owning spouse is hiding income in the company.
When do reinvested earnings become commingled community property? It depends. Are the retained assets reasonable for the proper functioning of the business? Companies usually retain three to six months of operating expenses as liquid assets, and anything beyond this is likely to generate attention. Industry volatility and the number of customers can affect this. A highly volatile industry may require more of a cushion. Likewise, a company with only a few customers.
If the company has no history of retaining cash, then suddenly doing so will be treated suspiciously. If the owning spouse has substantial control over the company’s assets, which may not be the case if other parties are involved in management, then retained assets are more likely to be community property.
Retained assets are essential to the health of a business. Sometimes, they are community property, subject to division in divorce. It’s essential to have a lawyer who understands what retained assets are, as this will ensure the assets are properly protected, characterized, and divided if appropriate.
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