Wofford Family Law

Small Businesses and Divorce by Laura B. Burt

In my practice as a family law attorney, I regularly meet with persons that have an interest in a small business and derive their income from the entity.  For these individuals, navigating divorce is not as simple as for people who are or have spouses that are W-2 employees. Regardless of whether it is you or your spouse that has an interest in a small business, if going through a divorce, know the following:

Business Expenses Will be Scrutinized for Support Purposes.  When one spouse owns an interest in a small business, the business expenses are likely to be closely scrutinized in divorce to determine if there are any expenses that should be considered as income for the purpose of calculating support.  The North Carolina Child Support Guidelines state that “[o]rdinary and necessary business expenses do not include amounts allowable by the Internal Revenue Service for the accelerated component of depreciation expenses, investment tax credits and other business expenses determined by the court to be inappropriate for determining gross income.   Further, expense reimbursements for the use of a company car, housing or reimbursed meals may be added back if they “are significant and reduce personal living expenses”.   In short, if the parties are unable to resolve issues out of court, the income and expenses from self-employment or the operation of a business may need to be carefully reviewed by the court to determine if amounts should be added back to a party’s gross income for the purpose of calculating child support and/or alimony.

The Business Entity May Need to be Valued.  When there is an interest in a small business, there is the issue as to whether the business should be valued.  Often one party (or both parties) have placed their heart, soul and years of their marriage into developing the small business.  The income it generates is their livelihood and, if they divorce, it’s value will need to somehow be divided.  A solid and reliable business valuation is critical. 

There are three basic methods to value a small business:  1) the Adjusted Net Asset Approach, 2) the Market-based Valuation Approach and 3) the Discounted Cash Flow / Income Approach.  With the Asset Approach, the small business is valued based on the actual adjusted net assets of the business entity.    With the Market-based Valuation Approach, the small business is compared to comparable recent sales of similar entities in the area.   And, with a discounted cash flow / income approach, the income from the business is based on a projected future cash flow and the time value of money to determine the current value.  Each methodology should be developed, to the extent possible, to determine the true value of an entity.  Hiring a knowledgeable and experienced business appraiser is crucial.

Clean Books Are Important.  All persons owning a business should make every effort to have sound accounting practices in place.  People going through a divorce, however, need to make certain their accounting practices are absolutely clear and clean.  Paying personal expenses via the business, even if such are accounted for as distributions to the owner, may  result in additional questions.  Having an accountant who regularly prepares Balance Sheets and Profit and Loss Statements, in addition to reviewing and categorizing income and expenses, is important.   When there are questions by the other party, there may be questions for the person(s) maintaining the books.  Having an accountant available to answer these questions is most helpful.  Being organized is crucial.  

Hiring an Experienced Attorney.   If you are considering divorce and have an interest in a small business, you need an experienced family law attorney that regularly represents persons owning small businesses. 

Wofford Law, PLLC