6 Divorce Tips for the Self-Employed
If you or your spouse are self-employed, a business owner or even a freelancer, you can expect to have some extra work to do before you file for divorce. Planning ahead and getting prepared by gathering your records and documents before you file your divorce case will help the legal process go much more smoothly.
- Make a plan
Start by assessing your overall financial situation. You’ll need to start gathering information regarding your and your spouse’s income, expenses, assets, and liabilities. Take advantage of any helpful features your electronic record-keeping system might have to produce reports and summaries, and begin gathering your tax returns for the last several years. In short, gather as much information about your business finances as you can. If you are the spouse of the self-employed party, know where the records are kept. Your spouse will likely be using some sort of software or cloud-based system like Quicken or FreshBooks to track the business assets, expenses, and finances.
- Hire a professional
If you don’t already have an accountant or lawyer, this may be the time to consider hiring one. You may also need to hire a professional business evaluator or a forensic accountant. Your divorce lawyer may be able to suggest which type of service you need and refer you to some professionals in the Dayton or West Chester area. You can discuss this at your free consultation and ask for recommendations.
- Level set your expectations on your business’s value
Be prepared for the professional’s valuation to be different than what you may have wanted to hear. Be careful not to set your expectations too high – or too low – if you’ve never received a business valuation before. Sometimes the self-employed spouse thinks there’s no value to the business, while the other spouse is assuming it’s worth millions. Level set your expectations as much as possible to avoid disappointment.
Also keep in mind that your family law attorney and the judge are not experts in business valuations. Business and income evaluation is the most complicated and misunderstood area of divorce law when one of the parties is self-employed. This is why your divorce lawyer will refer you to a professional in the field.
- Analyze the IRS Revenue Ruling
IRS Revenue Ruling helps evaluate what types of factors are important for determining the value of a business. The factors listed below may be considered by a business evaluator in connection with the valuation of a family-run business for a divorce case. All of the factors may not apply to your self-employment financial situation, but they include:
- History of the enterprise since the start and nature of the business;
- The overall economic outlook and the outlook of the specified industry;
- The financial condition of the business as well as the book value of the stock;
- The company’s earning capacity;
- The capacity of dividend-paying;
- Whether or not the enterprise has goodwill or other intangible assets;
- Information about the stock regarding the sales and the block of stock to be appraised; and
- The market price of stocks actively traded in a free and open market in the same or similar line of business.
- Be prepared for the Discovery process
Discovery will take place after a divorce action has been filed and before the trial begins. Discovery is when you can request relevant information from your spouse, and they will be required to reveal financial documents and facts that will help your family law attorney prepare for the trial or settlement. You can obtain several years’ worth of business records, including:
- Client lists
- Receipts
- Expenses
- Employee payroll records
- Vendors
- Tax returns
- Any other relevant business record
Your divorce lawyer will send a formal demand to your spouse’s attorney for this information, or they may need to subpoena a third party such as your spouse’s accountant for the information. If the information is out there, your attorney should be able to obtain it one way or another.
- Recognize the income available for child or spousal support
Calculating child support and spousal support also becomes more complicated when self-employment is part of the financial situation. Business expenses can offset business income, and the amount that gets claimed as personal income might not be as high as you were expecting. As always, support will be calculated based on the incomes and expenses of both parties, which makes it that much more important to hire a financial professional to help evaluate the business’s worth.
A note of caution on this: If your spouse runs a cash business, they will have ample opportunity to hide income. Income that isn’t reported may be tough to prove, and support can only be based on the records and documentation that are available to the court. It’s an unfortunate reality, so if you already know or believe your spouse may have been hiding income or assets, start documenting what you see and know as early in the process as you can. Hiring a forensic accountant during this process may pay for itself if your spouse is inclined to hide income.
Get your questions answered during a free consultation
Scheduling a free consultation is the first legal advice we can give you, and it’s where you might want to start! The experienced divorce lawyers at Kirkland & Sommers law firm only practice family and divorce law. As such, we are the experts in helping divorcing couples who are dealing with the complications of self-employment. First, we’ll listen to the particulars of your divorce and get to know you and the employment and financial situation for both of you. Then, we can give you some ideas on how to get started and what you need to do first in order to be prepared.
Whether you are the one who is self-employed, or your spouse is, you need to seek legal advice from an experienced divorce attorney very early in the divorce process. Schedule your free consultation today and find out how being self-employed will impact your divorce.