Updated: Mar 12, 2021
When one spouse is self-employed, a divorce can become more complex. Because you have direct control over your compensation, your ex might not trust that you're being honest about your income. There may also be disagreement about the value of your business. It's possible to inadvertently create community property interests in separate property businesses as well. You need to protect yourself and your business.
1. Your business may be considered marital property.
A business or business interest, whether in the form of a partnership, corporation, LLC, or sole proprietorship can be considered marital property in a California divorce. In California divorces, “marital property,” is more commonly known by the legal term, “community property.”[i]
Even when a business is separate property, it is possible to inadvertently create community property interests. When the value of a business increases after marriage and before separation by the effort of a spouse, the increase can be considered community property.[ii]
California law imposes on each spouse the highest legal duty of good faith and fair dealing in the law.[iii] Accordingly, artificially depressing the value of a business or unilaterally selling off business assets can expose you to significant penalties. Because a self-employed person has direct control over the business, any suspicious conduct can create red flags and cause possible exposure to liability.
2. The other party is entitled to your business records
Part of the divorce process in California requires making a full and honest financial disclosure to the other spouse.[iv] Beyond the basic requirements, each spouse is entitled to further records from the other.[v] In order to determine critical issues like business property characterization, asset division, and income available for support, the parties will likely need further records beyond the basic requirements.
In a divorce, each spouse is generally entitled to personal and business records. Discovery from third parties may be necessary as well – accountants, business partners, support staff, and more.
This is why it is absolutely critical to be honest and complete in your financial disclosure. You must produce quality and complete information.
Hiding business assets or income in a divorce is illegal. You should not do anything illegal. Yet, some people are tempted to hide business assets or income. They think they are outsmarting the system. No matter how shrewd you think you are, if you try this, you’ll most likely be found out. If your spouse has a lawyer, they’ve probably been through this before and know where to look.
If you are found to have been untruthful about your assets and hide them from your ex, it will destroy your credibility in court and give the other party an advantage. It can also cause the cost of your case to skyrocket. The less the parties can agree on, and the more formal investigation is needed, the higher the cost of the case for both parties.
3. You should consider hiring a business evaluator and/or forensic accountant from the beginning
Business valuation experts and forensic accountants play an important role in divorces involving self-employed spouses. Parties often argue about the value of the business and the self-employed party’s true income. In these situations, it is common for the other spouse to have an inflated expectation of the business’s value and cash flow.
Having the right experts in your case from the start can help give your position credibility in negotiation. Many judges and lawyers are not business valuation nor accounting experts. You don’t want to be negotiating without basis in logic and fact. You will waste time arguing without a practical path forward.
Having an articulate and established expert can give you negotiation position leverage. And, if the parties do not reach an agreement, you are still prepared to litigate. Bottom line: by being prepared to win in court and unleashing a proactive strategy, you negotiate from the strongest position possible.
[i] California Family Code §760 [ii] See, Pereira v Pereira (1909) 156 C 1, 7; Van Camp v Van Camp (1921) 53 CA 17, 29 [iii] California Family Code §721 [iv] California Family Code §2104 [v] See, California Code Civil Procedure., § 2016.010 et seq
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