Entrepreneur and Business Owner Divorce

It depends. Absent any prenuptial agreement or contract stating otherwise, the rules and definitions governing equitable distribution will shed light on this question. Separate property is defined as all real and personal property acquired before marriage, or property acquired during the marriage by bequest, devise, descent or gift. If you start your business prior to marriage with separate funds used as capital, your interest in the business is separate.

But be aware, simply because the business interest was acquired prior to the date of marriage, it does not mean that the non-owner spouse can take no value from it. If during the course of the marriage you transfer marital funds into the business, then your spouse is entitled to a portion of the value of these funds.

More importantly, labor-related contributions to the business given by either spouse during the marriage will affect an equitable distribution claim. That means the time you spend growing the business during your marriage has a value. If this effort on your part resulted in an active increase in the value of the business, then your spouse is entitled to a portion of the value of the increase. Along the same lines, if your spouse puts effort into making the business thrive, then he or she is entitled to some value for the active increase.

The point is, even if you started your business long before your marriage, chances are that at least a portion of the value of the business will end up being marital. That doesn’t mean that your spouse will have an ownership interest in the business, it simply means that you will owe some value based on the factors outlined above.

Hiding income to shirk child support or alimony obligations, or to receive a better property distribution settlement is not advisable. While your business offers a great vehicle to conceal income or assets, the consequences usually outweigh any benefit.

First, it is easy to get caught. Throughout the course of your divorce proceedings you will likely have attorneys and experts who are trained in finding hidden assets pouring through your financials. Chances are you’ll get caught.

At a minimum, concealing assets in a divorce proceeding can result in sanctions, including attorney’s fees for your former spouse. Also, a judge can hold you in contempt if you fail to abide by an order requesting that you disclose information and you fail to do so.

On a larger scale, if your hidden income or assets are not reflected on your tax returns you could face even more severe penalties. Tax fraud is a federal crime with serious consequences. Anyone can report potential fraud to the IRS simply by filling out IRS form 3949-A. If the IRS investigates and discovers fraud you could face massive fines or even jail time. So, while it may seem smart to under-report your income to avoid support obligations, it most likely is not worth the penalties you would incur should you be reported to the IRS and found guilty of tax fraud.

Calculating income for an entrepreneur can be difficult. Unlike traditional employees with consistent paychecks that indicate a clear salary, an entrepreneur’s income is very hard to calculate. The non-entrepreneur spouse will always argue that the entrepreneur spouse’s income is higher, so that support payments may be higher. The entrepreneur will obviously argue that his income is lower, so that the support obligation will be lower. So if it comes down to a he-said/she-said argument, what gives?

If you find yourself in this situation, consider hiring a forensic accountant to investigate your business venture’s financials and come up with a figure. This figure should exclude phantom income, and should predict your future income as well. If your spouse doesn’t accept your expert’s analysis of what your income is, then he or she may hire an expert to do the same on their behalf.

If the two experts come up with largely different figures, chances are you will find yourself litigating the income issue in court. In that case, the judge will hear the testimony of both experts, and will have to decide on a figure to use for your income. If it comes down to a “battle of the experts” you will have to rely on your expert to use credible methods of calculating income, and be able to easily explain the calculation to the judge.

Get creative. There is no rule that you must abide by these more traditional custody schedules. If you reach an agreement on custody in your separation agreement, then you can come up with a tailor-made custody arrangement that fits your unique schedule.

For instance, if your entrepreneurial responsibilities are going to keep you unreasonably busy during September and October, create an arrangement where you have less visitation during those months but have more in August and November. Or, if your business keeps you busy during most weekday evenings, try and arrange a schedule that allows you to pick up the children at your former spouse’s house in the mornings so you can treat the kids to breakfast and take them to school.

The good news is that although being an entrepreneur requires working more hours than most, many entrepreneurs are in control of their own schedules and can be more flexible when it comes to spending time with their children. Don’t assume that you have to stick to one of the more common custody schedules – consider a schedule that fits your untraditional working hours.

The simple answer is that yes, your business travel can affect your custody case.

A judge will not be inclined to issue an order on custody that includes a schedule that simply is not workable. So, if your business venture requires that you travel three weeks out of every month, a custody schedule that gives the entrepreneur parent visitation every other week simply is not workable. An entrepreneur who travels on weekends to visit trade shows and expos wouldn’t be able to abide by an every-other-weekend visitation schedule.

The judge will reconcile your travel plans with the child’s schedule and come up with a custody schedule that is workable. If you travel a lot for business, chances are your former spouse will be awarded more custody than you simply because you aren’t around to exercise visitation.

That being said, sometimes divorce acts as and eye-opener for entrepreneurs and they consciously decide to cut back on the entrepreneurial lifestyle in order to spend more meaningful time with their children. If you are one such entrepreneur, keep in mind that if your initial order or agreement on custody leaves you with an unfavorable amount of visitation, it can always be modified if you choose to cut back drastically on your travel obligations.

If the right circumstances exist, an alimony obligation can be modified. If something happens and your tech startup is slowly hemorrhaging money, or the bakery you opened is no longer profitable, there is a chance that your alimony obligation could be lowered. In order to have the option to modify alimony, some requirements must be met.

First, alimony must be set forth in a court order in order to be modified. If you agreed to a spousal support amount in a separation agreement, it may not later be altered. If the profitability of your business has the potential to fluctuate, you may want to consider obtaining an order on alimony rather than including in a separation agreement so that in the event that the business becomes less profitable, you still have the option to modify it.

If your alimony award is court ordered, a substantial change in circumstances since the original order was entered can allow the court to modify or vacate the order. You will have to provide evidence showing that the facts have changed since the original order enough to warrant a substantial change in circumstances. Make sure your original order sets forth enough findings of facts about the parties’ financial condition so that you can compare your new circumstances with the previous order, and show a substantial change in circumstances.

If child support is included in a court order, you will need to show a substantial change in circumstances since the previous order. So, if for whatever reason the business experiences a downturn, you can file a motion to modify your child support obligation based on a substantial change in circumstances.

If child support was agreed to in a separation agreement, it is still modifiable but in a different way. A parent will still file to modify the child support obligation, however a court will presume that the amount the parties originally agreed to was proper, just, and reasonable.  You will have the burden of overcoming this presumption.  You will also need to show what amount of child support is required.  Since the court was not involved in setting the original amount, you only need show what amount is required to meet the reasonable needs of the child. You are not required to show a substantial change of circumstances as you would if you were seeking to modify a court order.