Corona, California Divorce and Spousal Support Lawyers – Free Consultation
Dissolution of marriage (or divorce) cases can be difficult, especially when a one party is self-employed, owns a business, or works with a close friend or family member that owns a business. Many particularly challenging issues arise in these cases that should be worked through with the advice of a qualified family law attorney. This page provides 12 tips to assist both parties in working through the myriad of issues that arise when one or both parties going through a divorce is self-employed.
Of course, this article is not intended to provide legal advice and there are more than twelve issues to consider when a party is self-employed. You should always seek the advice of a competent family law attorney if you are self-employed or your spouse is self-employed and you may go through a divorce.
TIP 1 – GATHER INFORMATION
Perhaps the most important tip we can provide is in regards to information gathering. It is essential that both the employed spouse and non-employed spouse have ALL the information available that relates to the business’ income, expenses, assets and debts. All businesses have some sort of record keeping system, usually stored in electronic format on QuickBooks, Quicken, or cloud-based systems such as Freshbooks. The preservation of these records is essential to the proper administration of a divorce case with a business. If you are the business owner, make sure to make a backup copy of these documents and store the copy in a safe place. If you are the non-employed spouse, ask for this information from your spouse or obtain it by any legal means available. It is important to have a history of as many years of documents that is available.
TIP 2 – PLAN BEFORE FILING
Often, spouses rush to file a divorce case (which may be for a good reason). If you can avoid rushing to file, it is beneficial to obtain as many financial records as possible in advance of filing. Additionally, visit an accountant, financial advisor, and other relevant professionals to help you plan. Your family law divorce attorney will be able to provide you with resources for referrals for these experts. The more information you have going into a divorce case, the cheaper and quicker the case will be. Obviously, you might not be able to get all the information if you are the non-employed spouse, which is where discovery during the case can be useful.
TIP 3 – INCLUDE THE PERTINENT INFORMATION ABOUT THE BUSINESS IN THE PETITION
In California, a petition for dissolution of marriage is a relatively simple form with places to “check the box” for what you want. However, there are places in the petition form that allow for explanations, and you can also prepare as many attachment pages as you wish. When a party is self-employed and there is a business interest, it is prudent to list the business interest somewhere in the petition for purposes of identification. That will let the court know that there is a business interest that must be acknowledged and properly dealt with.
TIP 4 – EMPLOY A BUSINESS EVALUATOR
Business valuation experts may play an important role in a divorce case. There are a myriad of ways that the Family Court values business interests in a divorce case. Even a business with only one employee, such as a consulting business, might have a “marital value” that the Court will consider as community property. The two leading cases in California are Pereira and Van Camp, which are important to read and consider when a business interest is to be valued and divided. A business evaluator acting as a consultant can help formulate a plan for future arguments that the business is worth “X” amount.
TIP 5 – DO NOT HAVE UNREALISTIC EXPECTATIONS AS TO VALUE
Whether you are the spouse that runs a business or the non-employed spouse, do not set your expectations too high that the business is worth nothing or a fortune. Usually, businesses are worth something. However, the spouse running the business usually believes the value is worth nothing while the spouse not running the business is worth millions of dollars. The end result is that a business has some reasonable value depending on a variety of factors.
TIP 6 – UNDERSTAND THAT MANY FAMILY LAW LAWYERS AND JUDGES ARE NOT VALUATION EXPERTS, WHICH LEADS TO A WIDE VARIETY OF RESULTS
If you take a particular fact pattern for a divorce case with a business and put all the relevant facts before two family law attorneys and a judge, and take those same facts and put them before different family law attorneys and a different judge, you would likely find a drastically different result. There is no area of divorce law more misunderstood than business and income evaluation where one party is self-employed. Because most family law judges do not have a background in business, and because many family lawyers do not understand the complicated law relevant to business and income evaluations, this area can lead to the “wild west” of results.
As a result, it is important to educate the court using the appropriate case law, standards of valuation, expert testimony, and objective conclusions about the value.
TIP 7 – INTERVIEW SEVERAL DIVORCE LAWYERS
Divorce lawyers are not created equal. Some are better, more experienced, and provide superior service compared to other lawyers that practice divorce law. Some divorce lawyers have never handled a case involving a business. Some divorce lawyers have handled lots of these types of cases. It is important that you feel comfortable with the attorney you choose to represent you. For more information about selecting the proper divorce attorney, click here for our attorney selection guide.
TIP 8 – UNDERSTAND THE DISCOVERY PROCESS
Discovery is information gathering during a lawsuit, which includes divorce cases. There are many different mechanisms available to gain information in a divorce case, which includes getting information directly from the opposing party, or from third parties that have relevant documents or electronically stored information. If information exists, you should be able to obtain it one way or another. For example, you can send a formal demand that your spouse provide you with all documents and electronically stored information going back several years relating to the business finances, client lists (assuming there is no privacy issues such as health-related information that would be part of a doctor’s practice, for example), receipts, expenses and a list of vendors, employee payroll records, and so forth. You can also obtain information via subpoena, which is a demand for information usually sent to a third party that holds relevant information, such as a bank or other financial institution.
For more information about discovery, click here.
TIP 9 – REVIEW IRS REVENUE RULING 59-60
IRS Revenue Ruling is a good resource to see what types of factors are important for valuing businesses. Keep in mind that this list of factors is not necessarily the law in California, but could be considered among the other concepts involved. These factors would certainly be considered by a business valuation expert in connection with the valuation of a family-run business in a divorce case. The factors include:
1. Nature of the business and history of the enterprise since its inception.
2. The economic outlook in general and the condition and outlook of the specific
industry in particular.
3. The book value of the stock and the financial condition of the business.
4. The earning capacity of the company.
5. The dividend-paying capacity.
6. Whether or not the enterprise has goodwill or other intangible value.
7. Sales of the stock and the size of the block of stock to be valued.
8. The market price of stocks of corporations engaged in the same or similar line of
business having their stocks actively traded in a free and open market, either on an
exchange or over-the-counter.
TIP 10 – UNDERSTAND INCOME AVAILABLE FOR SUPPORT
Income available to pay child support and/or spousal support is an extremely important concept in family law divorce practice. This issue also relates to paternity cases where child support is at issue. When one spouse has control of a business, it is relatively easy to manipulate the numbers to make it appear that the income generated for that party is lower than the actual number.
The numbers that appear on a party’s tax return are helpful and relevant, but they do not paint the entire picture. Certain tax deductions that are permitted under state and federal law are not permitted to be “deducted” from income for purposes of calculating income available for support. For example, depreciation is a deductible business expense but is likely not a permitted deduction from income for purposes of calculating support.
When a business is closely held and child support or spousal support is an issue, you should contact an attorney right away (both sides). Obtaining the correct information through discovery should be planned well in advance of a hearing for support.
TIP 11 – REVIEW THE INCOME & EXPENSE DECLARATION CAREFULLY
Whether you are the business-owner spouse filling out an Income & Expense Declaration (IED), or the non-employee spouse reviewing that IED, is it imperative that you understand what to look for. There are many very important numbers that appear on the IED, and just as important, or perhaps even more important, is information that is not provided in a typical IED filed by a self-employed party.
There are attachments that are required for self-employed parties to provide along with their IED, including a Schedule C and profit and loss statement. If these documents are not attached, demand that they be provided. If the relevant documents are not provided, and if appropriate you can ask the court to continue the hearing to allow you time to obtain the necessary information and even to conduct discovery.
If you are the owner-spouse, keep in mind that there are significant downsides of failing to provide accurate information on an IED. First, the judge will not view you as credible, which will have wide-ranging implications in your case. For example, if you court does not believe you are credible because of an inaccurate IED, and you are arguing over parenting time for your children, don’t expect a favorable outcome. Second, if you fail to account for assets, the court could ultimately award those assets to your spouse. Third, if the court cannot accurately determine your income by reason of you failing to provide all the appropriate income, the court is permitted to make inferences that are negative toward your position.
TIP 12 – EDUCATE YOURSELF ON THE TYPE OF ENTITY INVOLVED, OTHER PLAYERS, ETC.
The more you understand about the ins-and-outs of a business operated by one spouse the better. First, you should understand the type of business entity that exists. Is the business a sole proprietorship, partnership, corporation, limited liability company, or something else? If the entity is a corporation, is it a “C” corporation or “S” corporation? The type of entity is important for a variety of reasons. For example, for incorporated companies, limited liability companies, and some partnerships, the business will have many important documents such as shareholder agreements, articles of incorporation, buy/sell agreements, bylaws, and various filings made with the Secretary of State where the business headquarters is located. These documents can provide vital information such as the date the business was started, other people involved in the business, and so on.
Second, many businesses involve multiple different investors, shareholders, owners, and other key persons which may hold important information about the business, the income and expenses of the business, and other key facts.