Self-Employment in Irvine Divorce Cases

Self-Employment in Divorce – Irvine Divorce Attorneys  -Free Consultation

With an ever-expanding market and economy, more and more individuals are becoming self-employed. While it may be a lucrative income strategy over time, many self-employed individuals encounter major issues when a divorce ensues. In most cases, one spouse is the manager who operates and understands the inner workings of the business, while the other spouse is the non-managing spouse who does not have an in-depth understanding of the operation of the business. Issues such as the division of the family business, custody and visitation, child and spousal support, and discovery become increasingly more complex.

Custody and Visitation

When first thinking about self-employed business owners, custody and visitation typically does not come to mind. However, this issue comes up more often than people think. With such a demanding schedule, many people feel as if they have to choose between their business and their children. Unfortunately, the sad reality is that this is often the case. The standard that a court uses to evaluate what is an appropriate custody and visitation order is not of fairness for the parents but of an analysis of the best interests of the child(ren). Typically, the best interests of the children do not align with that of the self-employed parent.

What is the best way to handle this disadvantageous situation?

From the moment spouses separate, establishing a temporary parenting plan could be the best course of action. Not only could this save parties a significant amount of money in future attorney’s fees but this could ensure a self-employed spouse a predictable and “fair” parenting plan.

What could you do to increase of your chances of getting more time with your child(ren)?

Articulate to the other parent your desire to have increased time with your child(ren). Documentation through texts and emails would be best as these could be submitted to the court in the future to show the other parent’s unreasonableness and unresponsiveness.

What if the parties cannot agree on an appropriate child sharing plan?

If the parties are incapable of coming to an agreement as to an appropriate child sharing plan, court intervention would become necessary.  Once your divorce is filed, you may file a Request for Order (RFO) in the Orange County Family Court seeking the Court to establish a set schedule.  In Orange County, it is wise to have an attorney represent you because every RFO hearing is treated like a trial.  There are rules of evidence and many issues that non-lawyers are not prepared to address.  Any party can file a request for a child custody and visitation order (FL-300) laying out the specific facts in his/her declaration as to why it would be in the best interests of the child to spend time with one parent more than the other.

While a court hearing is set for a future date for the issue of child custody and visitation, the parties are ordered to attend mediation before their court hearing date. If the parties are unable to mediate and agree upon a child sharing plan, the parties will go to court on the scheduled hearing date. While other counties are known as “recommending counties,” Orange County is not one.

What does a recommending county mean?

In counties such as Riverside and San Diego, if parties are unable to mediate and agree upon a child sharing plan at the mediation date, the court mediator will issue a recommendation as to what the mediator believes to be a child sharing plan that is in the child(ren)’s best interests based upon their analysis of their discussions with both parents. The report would then be submitted to the court for the court’s review. In these counties, the report itself has a fair amount of credence when it comes to the court’s determination of an appropriate child sharing plan. Most parties and attorneys stipulate to the terms of the report unless a significant issue arises such as the mediator not considering a key fact. The report is typically adopted by the court, although not in all cases.

However, Orange County is not a recommending county which means that if the parties are unable to mediate and come to an agreement, the parties will be forced to go to court. Importantly, the mediation session is private and the mediator does not issue a recommendation. The parties and their attorneys will need to provide evidence, witnesses, and any other relevant information to the court’s attention in order for the court to make an informed determination as to what is in the child(ren)’s best interests on the hearing date. This typically means that court hearings on custody issues can last for hours depending on the complexity of the situation and history of the parties. Having a skilled family law attorney to assist you in a non-recommending county may be advisable. Please contact our office to speak with one of our skilled family law attorneys.

Business Property Division

For cases where the business was acquired during the marriage (community property), a main point of contention is the valuation of the community business and thereby the division of the business. In most cases, the managing spouse believes the value of the business to be substantially lower than that claimed by the non-managing spouse.

Do you need a court order for a business valuation?

In many cases, a business evaluator, also known as a 730 evaluator, is appointed by the Family Court to provide an independent valuation of a community property business.  Each party may also appoint his or her own expert to testify as to the value of a community business. Although less common, the parties can stipulate to a particular business evaluator. The resulting stipulation must include with particularity the parameters of the evaluation and the roles of all those involved. A stipulation is less common because typically the managing spouse will claim that the business can be easily valued while the non-managing spouse will take a more precautious approach and will want a business valuation by an unbiased third party.

Further, any party can seek a court order appointing a forensic accountant to help evaluate a business.  This is less common and usually unnecessary, as both parties have a right to discovery during a divorce process and can utilize the efforts of his or her own forensic accountant to help analyze the income and expenses of a business.

Who can be a business evaluator/forensic accountant?

In the United States, forensic accountants typically hold the following qualifications: Certified Fraud Examiners (CFE), Certificate Course on Forensic Accounting and Fraud Detection (FAFD), and Certified Public Accountant (CPA).

How long does it take to conduct a business valuation?

While there is a no specifically set time frame, the length of time depends on how long it takes the accountant to obtain copies of the business documentation.  If the parties, specifically the managing spouse, is up front and providing all the necessary information, the process will be quicker.  If the managing spouse does not readily provide information and makes it difficult for the business evaluator to do their job, motions may have to be filed and the Court will intervene.  Typically, this will affect the timeline to get things done, and the managing spouse may be on the hook for attorney fees and costs (sanctions) for their lack of cooperation.  After the evaluator receives all the necessary documents, it takes generally 4 to 6 weeks to complete the appraisal. Thereafter, a report must be prepared and submitted for the attorneys’ review which could take an additional couple of weeks.

What is the general cost of a business valuation?

While the cost of a business valuation can vary significantly, the following factors can impact the cost of such a valuation:

  • Size of the business
  • Complexity of the business
  • Purpose of the valuation
  • Commingling of business expenses with personal expenses

The cost of a business valuation can be between $5,000 to $30,000.

Who pays the cost of the business valuation?

Typically, the parties share equally in the cost of the business valuation.  However, if a party retains his or her own expert to conduct a business valuation, the party that retained the expert will bear the expense.

Roles of the Parties in a Business Valuation

Role of the Managing Spouse

The managing spouse should be prepared to readily provide a copy of various business records – profit and loss statements, two or more years of tax returns, bank statements, credit card statements, and so forth.  Keep in mind that a managing spouse has a fiduciary duty to the non-managing spouse both during marriage and after the parties’ separation, so they should ensure that they provide a full, accurate and timely disclosure of the business’ financials.

Role of the Non-Managing Spouse

The non-managing spouse will have the opportunity to review the documents provided by the managing spouse.  They should hire their own expert(s) to help analyze the information and to ultimately prepare for trial.

What is goodwill?

Goodwill is an intangible asset of a company that consists of reputation, networks, intellectual property, and branding. Goodwill tends to be the value of the business to the community at large. After goodwill is valued, this can also be divided between the parties.

What is a receiver?

In certain circumstances, the Court may appoint a “receiver” to play a certain role in a community property business during a divorce case.  The receiver can liquidate assets to pay debts, run the business, or do any other task dictated by the court.  The court rarely appoints receivers and only does so when the spouse managing the business has shown that they:

(1) do not willingly provide financial information;

(2) hide assets;

(3) fail to comply with court orders;

(4) mismanage the business; or

(5) Otherwise portray conduct that is detrimental to the community property business.

Discovery

The importance of discovery involving cases with self-employed parties cannot be overstated. While the typical employee receives a W-2 at the end of the year, a self-employed individual does not, which makes income calculation for purposes of support increasingly difficult. Bank statements, profit and loss statements, check registers, general ledgers, and balance sheets are some if not most of the documents that are needed to analyze the income of the managing spouse. Please refer to our page on discovery for further details.

Deferment of Salary

In some cases, business owners have elected to voluntarily defer salary for the purposes of reinvestment into the business. Although a possibly lucrative business strategy, this leads to serious concerns for the non-managing spouse who is seeking child and spousal support. How do you calculate income for purposes of support determination?

In re Marriage of Berger (2009) 170 Cal.App.4th 1070, Husband decided to voluntarily defer his salary while continuing to pay his employees in order to reinvest in his company. As such, Husband did not “receive” income. The trial court denied Wife spousal support but ordered child support refusing to impute Husband with a salary as it concluded that he derived no income from the business other than the monthly amount necessary to pay the insurance needs of the family. The Court of Appeals reversed the trial court’s decision, stating that Husband’s income should be measured by the earnings he has chosen to give back to his company or at least to characterize his decision to do so as a “special circumstance” which warrants a departure from the guideline support amounts. Husband must be treated as though he were actually receiving the income to which he was originally entitled.

Speak to one of our attorneys today if you are involved in such a situation.

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