Cathy Hunt, a divorce attorney in Raleigh, NC at Gailor Hunt Davis Taylor & Gibbs, PLLC answers several questions she regularly receives from business owners and executives about divorce and how it will affect their business.
The true monthly take-home income of a business owner has to be calculated correctly so that it does not include what is known as phantom income. Phantom income appears when income from a partnership, limited liability company (LLC), or S Corp flows through to a personal tax return and reflects more income for a business owner than he or she actually receives. Whether you are in court or trying to settle your case out of court, it is important that the business owner’s income is not misrepresented to include income he or she never receives.
In a recent case, the member of an LLC was in court where his wife was suing for alimony. The wife’s lawyer continued to waive the husband’s tax return around proclaiming that the husband made $1,000,000 per year. Although there was taxable income of $1,000,000 per year, the cash remained in the company or was distributed to the husband only in an amount sufficient to pay taxes. The court in that case awarded the wife $25,000 per month in alimony based on the Husband’s tax return. It is important for your legal team to retain an accountant who has experience calculating net after tax cash flow in divorce cases and who has experience testifying as an expert before a Court. An independent third party expert also lends credibility to the amount of actual take home pay received by the business owner.
Yes, if either spouse has filed a lawsuit with allegations of adultery, they can request emails, text messages, and phone records from the other spouse or from a business by subpoena or through a process called discovery. A spouse may also issue a subpoena to a company to take possession of electronic devices for copying or to require the company to produce emails, texts, and phone records. A spouse who receives a request for his or her work email or phone records may be able to file an objection on the grounds that the request seeks privileged or protected information or is otherwise unreasonable and burdensome. However, a Court will likely order the objecting spouse or his or her company to produce the requested information. If you don’t want your company dragged into your personal divorce, don’t use a work email or device for non-work purposes.
It depends. A business owned by both parties and created during the marriage is considered marital property and would be subject to distribution in a divorce. The business is treated like any other property owned by the spouses. The parties can decide who gets the business, or if they can’t decide, the court will likely award the business to the spouse who is more involved or capable of running the business. In that case, the business must be valued and the retaining spouse will pay the departing spouse for his or her interest in the business. That payment may be in cash in the form of a lump sum or over a period of time, or it may be offset by other marital assets.
Two common problems that business owners make are naming a spouse as an owner who doesn’t really work in the business and not having a buyback provision to retain control of shares if an owner gets divorced. The best way to protect a business from a potential divorce is to only name as owners those that are genuinely involved in the business. Difficult operating issues arise if spouses divorce and a non-involved spouse has rights as an owner to the books, records, and bank accounts. For example, in a divorce case, a husband and wife were 50/50 shareholders in a business although the wife did not work in the business. When there was a domestic dispute, the company came to a complete standstill, because the wife used her rights as an equal shareholder to access assets in the business. The parties spent substantial funds in court trying to gain control of the company. Meanwhile, the company was in complete deadlock. In addition, there are a number of contracts that business owners can use to protect their interest in their business if they divorce. These include premarital agreements, post- marital agreements, buy-sell agreements, operating agreements, or shareholder agreements. When spouses divorce, the business will be awarded to one of the spouses. To prevent shares from being distributed to a business partner’s spouse, all agreements should have a buyback provision in the event of a separation or divorce with a corresponding value at which the company can buy the shares back. This will protect the company from having an unwanted and disgruntled shareholder if one of the owners gets divorced.
Often a business is one of the most valuable assets in the marital estate. Business valuation is a highly specialized area, and should only be done by a certified business appraiser. Divorcing owners often want to hire their CPA to value the business to save money or because they do not consider the potential far reaching effects on the business. The old adage “you get what you pay for” applies in this context, and divorcing business owners must be careful not to compromise their entire case by getting a business valuation that cannot withstand challenges to its accuracy in litigation. An inaccurate business appraisal is not only detrimental to the divorcing spouse, but its impact is also felt by the business and other owners. This occurs because the incorrect value will serve as precedent in negotiations over the sale of the company or the buyback of an owner’s shares or in the valuation of another owner’s interest if he or she gets divorced. All of these costly mistakes can be avoided. Having the right team of legal and financial advisors experienced in business valuation and complex financial cases is the best protection against the far reaching effects of having a business valued incorrectly in a divorce case.
Who gets the family business in a divorce? Will I continue to co-own it with my spouse? Will I have to buy out his or her interest? How will my business be valued? Will I need to hire an expert? In this episode, host Jaime Davis and her law partner Nicole Taylor discuss the answers to these questions and more concerning what happens to the family business in a divorce.