Information About Businesses and Professional Practices in Divorce
When couples are getting divorced, and one – or both – spouses have business ownership interests, law practices, medical practices, or other professional practices, reaching a settlement takes a bit longer. Business value must be assessed, goodwill and hard assets must be determined, cash flow and officer loan accounts must be analyzed, and the determination must be made as to whether profits are deemed as assets related to property division, or as an income stream by which support is calculated.
It is not immediately clear how much a business is actually worth, considering things like the state of the economy, minority ownership interest, marketability, and projected earnings. Additionally, business value can be affected by the value a key person brings to the business through their reputation or special skill.
By Applying Our Business Knowledge and Analytical Skills, Our Attorneys Are Known as the "Go-To Team" For Divorcing Business Owners and Their Spouses.
Our Founder and Lead Attorney, Irwin M. Pollack understands the financial structure of a business – he knows what it takes to keep it running. He can effectively read and interpret financial documents, as well as profit and loss statements. He can help determine correct property valuation, while recommending an equitable distribution of assets.
Who Gets the Business?
There are some basic and inexpensive options for handling the division of businesses and professional practices:
Option #1 – The Buyout: One spouse keeps the business and gives the other spouse a cash equivalent. In this scenario, the entity remains intact after a divorce, and there are no costs incurred.
Option #2 – Sell the Business; Split the Proceeds: Sell the business to a neutral third-party and divide the profits. This move liquidates the asset, but you may run into a roadblock — you can never predict whether or not you'll find the right buyer at the right time.
Option #3 – Structure ownership on a fifty-fifty basis: If the business is a major family asset and income stream for both parties, this allows the business to continue operations and provide income to both spouses.
Under-Reported Income and Hidden Business Assets
Many times, concerns about a spouse's business interests start with a small suspicion. Things just don't add up. Assets that were there before have since disappeared. Statements your spouse makes don't match with that you were told earlier. A majority of the time, recurring patterns of under-reporting fall into two types: sham transactions and questionable investments.
Sham Transactions: These often include increases in the cost of goods sold, a decrease in income, delays of income until post-divorce, inter-family and self-dealing, hidden or new bank accounts, and debt write-offs that are fraudulent.
Questionable Investments: Examples include automobile write-offs, abuses of petty cash or inventory, owner salary levels that are unreasonable, writing personal expenses off as business expenses, etc.
Our Legal Team Inspects all Tax Returns and Supporting Documents
Tax returns are the first place to look to discover hidden assets. It is a good idea to look five years back. Our attorneys have found that a thorough analysis allows you to discover assets that you had no knowledge of or that were not disclosed by your spouse. The first two pages of a tax return can serve as a "table of contents" of sorts because they list the forms and schedules that are attached to the return.
Important forms to review include:
Schedule A – Itemized Deductions: May help identify unlisted assets or sources of income.
For example property taxes may reveal real property or a boat that one spouse does not know exists; and gambling losses would reveal that there are gambling winnings.
Schedule B – Interest and Ordinary Dividends: This identifies the assets and investments generating interest and dividends. However, some income-generating accounts may be non-taxable and may not be listed.
Schedule C – Profit or Loss From Business: This form may be a place to hide assets or income. For example, depreciation for real estate is generally not a cash outflow and it is added back to net income to determine the actual income. The depreciation schedule may also reveal additional assets in the business.
Schedule D – Capital Gains and Losses: This form is used to report gains and losses from stocks, bonds, and real estate.
Schedule E – Supplemental Income and Loss: This form is used to report income from rental properties, along with royalties, partnership and S-corporation income. Depreciation should be examined to determine whether this is an expense that should be added back to income.
Additionally, Form 1065 is used to report partnership income, Form 1120 and 1120S are used to report corporate income, and Form 2441 claims child care expenses. Each of these has some value in evaluating the finances of a business or professional practice.
Boston-Area Business and Professional Practice Divorce Attorneys
No matter which office (Woburn or Norwood), or which attorney you work with…our legal team knows how both federal and state income tax returns, as well as 1099s, W2s, and amended returns need to be reviewed before a complete analysis of a business or professional practice can be evaluated.