Many divorce cases in Fairfield County involve parties who own and operate their own businesses, including law or medical practices, small businesses, and family businesses. Parties living in Westport and Greenwich often want to know what will happen to the business in the event of divorce: Will the non-participating spouse get an ownership interest in the business? Will the business have to be sold?
In divorce cases in Connecticut, the Court, among other things, is concerned with the income of the parties and the value of their assets. Where there is a closely-held business in which a party has an interest, particularly if this business is the main source of that party’s income, the business is both a marital asset subject to equitable division and a source of income from which alimony or child support can be paid.
Each side should discuss with his or her attorney early in the case whether it is appropriate to hire an accountant or business valuation expert in order to assist in valuing the closely-held business interest and/or in assessing the income a party earns from the closely-held business. Occasionally, parties and their counsel will agree to jointly hire an accountant or business valuation expert for these purposes. At Broder and Orland, LLC, we frequently work with accountants and business valuation experts as part of our team when a closely-held business is involved.
At the beginning of a divorce case, discovery will need to be done in order to ascertain the income, expenses, assets, and liabilities of the closely-held business in which a spouse has an interest. Accountants and business valuation experts can be helpful in crafting the discovery requests. It is typical for the non-participating spouse to ask for and receive a copy of the books and records of the business operated by the other spouse. It is not uncommon for a business valuation expert to seek, at a minimum, five years of tax returns and other financial books and records in order to accurately value a business. If you own a business and plan on getting divorced, it is beneficial for you to begin to gather and organize these documents before you speak with a lawyer. Being prepared early on in the process can lead to a quicker resolution of your case.
Once the discovery regarding the business has been exchanged, both sides begin their analyses. Common issues that often lead to scrutiny may include: (1) deductions that do not qualify as business deductions under the IRS Code; (2) the failure to file tax returns; (3) the failure to segregate business financial accounts from personal financial accounts; and (4) the rerouting of profits or income to individuals other than the business owning spouse. Sophisticated counsel will work diligently to make sure these issues are identified and addressed as soon as possible.
The business owned and operated by a spouse often (though not always) constitutes a significant portion of the family’s assets. Except in rare circumstances, the spouse who owns the business typically retains his or her business interest in the divorce. This does not mean that the spouse-owner will walk away with a greater portion of the marital estate, however. The parties can agree or a Court can order that the business owner spouse “buy out” the other spouse’s marital interest in that asset. If there is not enough cash or other assets available to offset the interest in the closely-held business, the spouse-owner can make payments to the other spouse over time to buy him or her out of his or her share of the asset in a manner that preserves the business as an income stream. Sometimes agreements are structured so that “if, as, and when” a person sells the business interest after the divorce, the other party receives a certain percentage of the net sale proceeds.
A frequently discussed issue in divorce cases involving closely-held businesses is “double dipping.” “Double dipping” refers to the idea that if a spouse is being “bought out” of the interest in a closely-held company that is also the family’s main source of income, the spouse being bought out does not also receive alimony as if the business asset had not been “divided.” There are ways to avoid double dipping that also allow the non-participating spouse to receive sufficient support payments while sharing in the value of the business as an asset.
These are just some of the issues that arise when closely-held businesses are involved in divorce cases. At Broder & Orland, LLC, our attorneys have significant experience representing both business owners and the spouses who do not have a direct interest in the business in divorce cases. Regardless of which side we represent, we work creatively in structuring settlements that serve both parties’ interests with respect to the closely-held business in question. We have also aggressively litigated divorce cases involving closely-held businesses, employing expert testimony and complex financial analysis on behalf of our clients. Any person anticipating a divorce where a closely-held business is at stake should consult with an attorney in order to get a better understanding of how Connecticut law views closely-held businesses in divorce cases.