When one or both divorcing spouses owns or operates a family business, unique questions emerge.
Laying the Groundwork
First, lawyers must determine some essential facts related to how the business is organized, as follows.
- The type of business: partnership, corporation or other form of organization
- The extent or percentage of each spouse's ownership and/or interest in the business
- The professional designations of each spouse in the business (position or title)
- Information concerning additional owners, such as names, place of residence, their titles and the extent of their interest
- A list of any business professionals contracted with or employed in some capacity by the business (attorneys, CPAs, etc.)
- Details concerning bookkeeping/accounting for the company, such as location of the books, how they are prepared and maintained, any software used in their preparation, who prepares financial reports and how often and information concerning how, when and by whom the books are audited
- How and by whom tax returns are prepared, whether or not there is any outstanding debt to shareholders (if any) and who is responsible for maintaining bank records for the business
- Whether or not any money is owed to the business by shareholders
Gathering the above information serves to clarify the financial details surrounding the business in order to accurately determine the income, assets and other forms of compensation that has enabled the couple to maintain the style of living that they have been enjoying. The information gathered above can uncover assets that would otherwise be hidden or overlooked as there are myriad ways to obscure various transactions, forms of compensation or perquisites, tax and/or stock advantages, loans that the business might have made to its shareholders and agreements for reimbursements of taxes. All these things must be taken into account in order to accurately evaluate the impact of a business during the division of a marital estate.
Deposing the Business Owner
When a divorce attorney deposes a family business owner (brings him/her in for questioning), specific and detailed information must be obtained.
The attorney for the spouse who does not own the business will be questioning the spouse who does and will wish to elicit the following information:
- The attorney will need to establish how the owner came by his/her interest in the business, whether he/she bought it or established it and where the start-up funds came from.
- If the money was borrowed, the attorney will need to determine who paid it back and how, and what accounts were used for the repayment.
- If the business was a bequest or a gift, whether one or many transactions were required in its bestowal.
- Your attorney will ask whether or not appraisals were prepared when the business was transferred and if estate tax returns or gift tax returns were filed by the person who transferred it.
Considerations around Closely Held Businesses
In order to determine if a business owner is hiding assets during a divorce, a lawyer will carefully review the finances of a business, (especially if the lawyer is representing the non-owner spouse in a divorce). A review of check registers would be made to ensure that nothing out of the ordinary has taken place. Evidence, such as checks written to family, friends or significant others, department stores or other retail establishments, unfamiliar vendors or credit cards, could be found in this examination. If there is no such evidence, you will still be in a better position to decide if the investigation needs to go on as you will have a much clearer picture of the financial status and management of the business.
Keep in mind that business owners who run every aspect of the business can thwart internal controls and usual bookkeeping procedures. Thus, any business controlled exclusively by the spouse involved in a divorce should be a natural target of skepticism or investigation by an attorney or an investigator. If the spouse is minority shareholder or had minimal control over the business operations, then he or she will be treated as an employee during the investigation.
To conduct this business investigation, your divorce lawyer will require the bank statement and check registers, which are the same documents required for an investigation of a single wage earner. But for a business investigation, such documents for both the couple’s personal account and business account are required.
Investigating the business account will involve review of the following:
1. Amount of money coming into the business
2. Interbank transfers
3. Unusual bank transfers
For check registers, he will review:
1. Payments made to or on behalf of the business owner
2. Substantial or unusual transactions
3. Non-business expenditures
The objective here is no different from other investigation for hidden assets, which is to discover any of the spouse’s undisclosed possession or assets (including income).