Written by attorney Eric Alvin Ballinger

Divorce and the family business

While every divorce case comes with its own challenges, those cases involving people who own their own business have a unique set of challenges. The challenges come in the computation of income as well as the division of the business as an asset of the marriage.

In handling the small business as a issue of a divorce, there are a number of methods that experienced lawyers use and experts to employ in order to insure that their clients interests are served.

Determining a business owner's income

The income of a small business owner is a difficult issue that is often fraught with a great deal of emotion. Unlike a wage earner, there is no single document or series of documents that a party can point to support income of a small business owner. While most small business owners pay themselves a salary, there profits of the business, over and above the salary, are taxed to the owner as income as well. This can be a sore subject because many business owners plow these profits back into the business in order to build the enterprise instead of taking this money home.

Another issue of contention with the small business owner is the benefits that a owner receives. Most owner operators will pay their vehicles, cell phones, fuel and other reasonable related expenses from the business and write them off as company expenses or shareholder disbursements to be taxed at a lower rate. The main issue with regard to income in a business is the uncertainty. While most successful business do show a track record of increasing revenues, expenses and incomes, the future holds a level of uncertainty that nobody is willing to predict. This is especially true when those predictions are being used to assess child support and alimony.

Another issue that comes into play in determining the income of a family business is taking into account how much of that income is reflective of the efforts of the entire family member and not just the efforts the spouse that is taxed on the income as the, "front-man". In a divorce, a family business will lose the efforts of a spouse who has provided a critical role in that business.

There are several questions that will need to be answered:

  • What sort of income should be attributed to the "unpaid" spouse leaving the business?
  • What is the cost of replacing the efforts the former spouse put into the business?
  • What is the loss to both the profitability and the value of the business due to the loss of a spouse who is also a key employee?

The answers to these questions are just as important as the income of the owner, but another critical piece of information is the value of the business.

While income is the most significant factor in determining child support and alimony, mere tax documents and wage documents will not give a clear picture. Under Georgia law, income is calculated by a different formula than that used by the Internal Revenue Service to calculate taxes. In many cases, the deductions allowed for the purposes of Federal taxation are not allowed in calculating child support. The income the family business generates is most important for setting support as well as detaining the value of the enterprise as well.

Calculating the value of a family business

Determining the value of a family owned business is critical part of the dividing the assets of a marriage that owns a business. In many cases, the business can be the largest asset of the family, even greater than the house. The opinions of the value of a family owned business will vary greatly especially between the spouses who are vying for a favorable split of the marital assets.

While most family businesses are service-based and the value rests in the reputation of the owner as well as the ability of the business to generate a cash stream, some family businesses do have significant assets in property, equipment and customer base that can be transferred for value. Of course, this presupposes a balance between transferable value of the business versus the income the business generates for its owner.

While the value of the business is important, there are issues that arise out of that value:

  • Is there any personal debt of either spouse attributable to purchase or investment in the business?
  • Is that debt secured to any other assets of the marriage, such as the house?
  • Does either spouse have a non-marital interest in the business as either an ownership acquired prior to the marriage or through inheritance?

The answers to these questions are critical in insuring a good and equitable division of the business. The issues raised here are the same issues that a judge will need the answers to in order to render the most accurate decision with regards to all of the major issues, child support, property division and alimony in a divorce where the is a small business.

Yet, despite this need for financial details, many people choose to proceed with this complicated type of divorce on their own and try to answer these questions for the court based on emotion, opinion and biased speculation. Evidence of this caliber is not very helpful to a judge making these complex decisions and the court will choose err against the side that has the most access to the information it needs. To best present your position regarding a family business, it takes a qualified team.

Hiring a qualified team

First, you need to have a lawyer who is experienced in business matters as well as family law. It is not recommended that the corporate attorney handle the divorce. In fact the corporate attorney may have a conflict of interest in representing both the business and one of the spouses. The best lawyer to handle the divorce needs to have some corporate experience, family law experience and experience handling divorces involving family owned businesses.

Second, the team needs a forensic accountant who is experienced in business valuation. A forensic accountant can not only help to present the financial information the court needs to best set an accurate income, the accountant can run projections to establish an income for the non-compensated spouse and project the costs involved in replacing the productivity of losing that key employee. A forensic accountant can also best place a value on the business both as of the date of the divorce as well as at the time of the marriage. Most importantly, a forensic accountant can accomplish this using Generally Accepted Accounting Principles (GAAP) that will be more credible with the court than the opinion of either party.

In the event a family that owns a small business is going through a divorce, it is necessary to have the right team to represent the interests of each party. These cases present complexities over and above the divorce for a wage earner. It is important to pay special attention to the needs that this sort of case presents and have a team that can deal with these needs in addition to the other issues that the divorce case presents. This means having an experienced lawyer and a forensic accountant on the team.

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