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Self-Employed Litigants and Forensic Accountants in the Divorce Process

Self-employed professionals can face a myriad of issues during the divorce process depending on the nature of the business, the holding of the actual company (S-Corporation, LLCs, LLPs, sole proprietorships, etc.), the date the business was started (before marriage, during marriage or post-separation), and the compensation scheme of the business owner (among other issues). However, the two main issues that arise with self-employed business owners are (1) cash flow determinations for support-setting purposes (both child and/or spousal support) and (2) the value of the business for purposes of property division (oftentimes a “buy-out” of the other spouse’s interest in the business). Both the cash flow and business valuation analysis will likely require the use of at least a forensic accountant (if not additional experts) well versed in the particular business subject matter (which can either occur by way of a Court-appointed expert who is a “neutral” and serves as the Court’s own expert to determine said issues or a party retained expert– a discussion of the pros and cons of each are discussed further below).

The nature of the business holding may have an impact on both the cash flow of the business and the value of the business. With a corporation there may be other shareholders that hold stock or shares of the company, which may thereby effectively reduce the community’s interest in the business and/or the cash flow, if other shareholders are involved. With Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs), the same may hold true; however, for purposes of discovery (when one party issues subpoenas to financial institutions or seeks to obtain financial information from the other party related to the various assets of the business, including bank accounts, etc.), different rules are applicable as to whether privacy concerns for other partners (or third parties) would prevent the disclosure of such information absent some sort of court order compelling the disclosure (and this is oftentimes balanced against the fiduciary duties that a spouse may owe to the other spouse to provide information, but not necessarily at the expense of third parties who are not involved in the proceedings other than by virtue of their involvement with the business). Speaking with an experienced family law attorney prior to either setting up the business or getting a divorce may save you both the headache and financial stress of having to deal with such issues if you ever go through the divorce process (see our pre-marriage and pre-divorce planning section). Corporations generally do not have a right of privacy (and information that would otherwise be discoverable generally in a divorce when dealing with corporations may have to be produced, when the same may not necessarily hold true for LLCs and LLPs). Sole-proprietorships on the other hand are generally run by the business owner (as in the case of doctors or lawyers) and there may not be any additional owners involved (however many businesses are not run as sole proprietorships due to the tax implications both on a State and Federal level). The main focus of this article is not necessarily on sole proprietorships (although the same rules may apply as with other business structures).

As referenced earlier, a Court-appointed expert is one that is appointed on the Court’s own motion (meaning by the Court itself) or by application by one party to the Court. The expert is appointed under California Evidence Code Section 730 and serves as the Court’s expert. The Court-appointed expert would usually request/demand information from both parties (but likely more so from the party running the business since he or she is likely the one in possession of the records) and he or she will prepare a report to the Court with his or her findings. The benefits of a Court-appointed expert generally relate to the costs (instead of having multiple forensic accountants, usually one is only appointed and assuming the job is done right, both parties may agree to the findings and streamline the process) and the fact that the expert serves in a “neutral” capacity with the intent of completing his or her assignment and providing his or her findings to the Court directly. The downside is that the Court-appointed expert is not your advocate. He or she will not take positions that may help your position/case and that may translate to a significant financial impact to one party over the other. Unlike a Court-appointed expert a party’s separately retained expert is his or her advocate (just like your attorney). The retained expert will usually ensure that his or her client’s position is strengthened (explaining any discrepancies) and will be willing to testify in Court on key issues that could benefit the client (where two forensics could differ).

Documents that are likely to be produced in the discovery phase or by request of the Court-appointed expert for business owners may include: tax returns (both personal and business), business and personal bank statements, business and personal credit card statements, ledgers, profits and loss statements, balance sheets, lines of credit (if used by the business), payroll information (which may incite third party right of privacy if it involves third party employee information without the necessary notices to the employees), and various other information that may be requested in an inventory request by the expert.

It is not uncommon for there to be multiple revised reports (from the first draft through the final version) because with additional documentation and information (that may be subpoenaed when it was not available at the beginning), the findings may change. Usually prior to trial or a hearing the experts (assuming each side has his or her own expert) may be required to speak with one another (or often do as a general protocol) to share their findings and determine where differences may exist in their findings/analysis.

Forensic accountants, while not necessarily cheap, are oftentimes crucial (and well worth the money spent) especially if you are dealing with a potentially high support order (finding of income by the business operating spouse) and buy-out (based on the valuation of the company). Further, just because the business was started prior to the marriage (and not during marriage) does not mean the community has no interest in the business. That issue is beyond the scope of this article, but there are different approaches utilized by the experts and the Courts in determining a community interest in what may be a pre-marriage owned business.