A Dallas Divorce client raised an important question this week. She owns a small professional practice that is an S-corporation. Her business has some cash flow that allows her to pay the business expenses and payroll, but not much extra. Her husband requested the Dallas Divorce Judge to make the wife turn over the cash she presently had in her business to help pay the husband's marital debts.
In a Texas divorce, a judge may only award shares of corporate stock in a divorce, and may not invade the corporate assets. Moreover, a judge may not divest a spouse of separate property corporate stock and award it to the other spouse. Retained earnings (cash) of a company are a corporate asset and are not marital property, either separate or community. The fact that the corporation is a Subchapter S corporation does not determine who owns the corporation’s earnings. A corporation may, in its discretion, distribute its income to its shareholders, but it is not required to do so. Further, it cannot be compelled to do so by a divorce court that lacks jurisdiction over the corporate entity. The shareholder in a Subchapter S Corporation has no greater rights over corporate property than a shareholder in any other corporation.