Being Self-Employed And Owning A Small/Medium Sized Business During Divorce

The team here at IAMLIP wanted to write this Help Guide to discuss the subject of divorce, self-employment and/or owning a business because it is very rarely talked about yet effects so many people across the country.

If you or your ex-partner are self-employed then your income is dependent upon the net profit you declare on your tax return. And it is this figure that the court and the child maintenance service (CMS) will consider when it comes to paying child maintenance and spousal maintenance.

(Net profit is profit after costs, fees, interest, and tax)

This is different from being a PAYE employee of a company or organisation where your salary is declared on your payslips and your P60.

Being the spouse of a person who is self-employed or if you yourself are self-employed can bring a great deal of uncertainty about actual earnings, future income, and calculations for maintenance during a divorce.

In this Help Guide we will answer some of the most asked questions related to divorce, self-employment and owning a small or medium size business.

1) CAN YOUR SELF-EMPLOYED EX-PARTNER DECLARE LESS EARNINGS, PAY THEMSELVES THE MINIMUM WAGE OR SHOW BIG EXPENCES TO PAY LESS CHILD AND SPOUSAL MAINTENANCE?

Even though it is against the law, your self-employed ex-partner can hide and downplay actual earnings by doing the following actions –

• Accept cash as payment and not declare it. 
• Accept payment in goods and services and not declare it.
• Have high expenses to show business losses.
• State they are ill and are not earning, but the reality is they are earning by accepting cash payments and hiding it.

As stated above, maintenance calculations will be made using these declared ‘manipulated’ income figures.

2) WHAT CAN YOU DO TO CONTERACT YOUR EX-PARTNERS CLAIM THAT THEIR SELF-EMPLOYED INCOME IS LOW?

There are many things you can do to show that your ex-partner is earning more than they are declaring. It is important to start gathering your evidence well before you file for divorce and most probably without your ex-partner finding out what you are up to.

• Try and gather documentation on the business revenue and customers. 
• Hire your own accountant to go through your ex-partners business and provide a valuation of the business.
• You can also hire a tax consultant for the same purpose as above.

3) CAN AN ACCOUNTANT BE ASKED TO PREDICT FUTURE EARNINGS OF YOUR SELF-EMPLOYED EX-PARTNER OR THEIR BUSINESS IN A DIVORCE?

If your ex-partner is making losses in their business, then the court may ask their accountant or a independent specialist accountant for a report predicting future income. The court can base maintenance calculations on this, but it is a prediction, and you may find yourself back in court later when the business better than predicted. 

Predicting future income is important for spousal maintenance calculations.

4) HOW IS A SMALL AND MEDIUM SIZE BUSINESS VIEWED DURING A DIVORCE?

There are two basic aspects of a business that are taken into consideration during a divorce:

• Does the business ONLY provide an income for the family to live on but has no monetary value? – If this is the case very often the business will stay with the ex-partner whose business it is and calculations of maintenance will be done and perhaps some offsetting. 
• Does the business provide an income for the family to live on AS WELL AS have a monetary value which then makes it a marital asset? – If the business has a monetary value as well then it must be determined how this asset can be spilt without damaging, selling, and disrupting the business. Often the business will remain intact and cash, or other assets paid to the other ex-partner.

5) WILL THE COURT ASK FOR THE BUSINESS TO BE VALUED?

If the business has a monetary value then the court will ask for the business to be valued as it will be regarded as a marital asset. This valuation may cost a great deal of money depending upon the size and complexity of the business.

To value a business the following have to be taken into consideration:

• The structure of the business – Is the business a limited company, a partnership or operated as a sole trader.
• What assets the business owns – Property, stock, other businesses and good will.
• Review and earnings – Past, present and future.

So that there is no dispute in the value of the business between the divorcing ex-partners, the court may order a joint expert such as a specialist accountant (agreed by all parties) to value the business. The costs will be shared by both parties. It is always better and cheaper to appoint a joint expert rather than one individually.

No doubt the business has it’s own accountant and they could value the business but as business valuation can be a specialised field it is always better to appoint an independent expert.

6) WILL A COURT TRY AND KEEP THE BUSINESS INTACT AND WITH THE MAIN OWNER INCHARGE?

The court understands that if the income from the business provides for the family then it should remain intact and continues to provide this income. The courts may share the income and the shares of the business between the divorcing ex-partners. How future income is to be apportioned will depend upon family circumstances.

Where a business has a monetary value and is an asset that will need to be divided between a divorcing couple, the court will again try it’s best to keep the business intact. The court is aware these decisions will not only affect the family and their income but also employees of the business, other owners, the community and other businesses dependent upon the business in question. More often than not the court will try and keep the business intact and with the ex-partner who mainly runs it and offset the business with other assets for the other ex-partner. 

The court will also try not to sell business assets to pay an ex-partner. Instead they may award ongoing spousal payments from future business income and perhaps a lump sum from other liquid assets within the family.

The decisions made during a divorce regarding a business are on a case by case basis but one thing is for sure, the court will try to minimise any disruption to a business as possible.  

7) CAN YOU DIVORCE PROOF YOUR BUSINESS?

A business can be regarded as a marital asset in the family court especially if it has a monetary value. During a divorce the court may want to divide or offset the business so there is fair division between both ex-partners.

This can cause a great deal of stress within the business, on its reputation in the public eye, with customers and employees. Divorce can make employees, the public and the other owners to lose confidence in the business. The best way to safeguard your business from divorce is to have a pre or post nuptial agreement in place.

If you started your business before your marriage and you put in all the money and effort to get it off the ground, then it is wise to have a pre-nuptial agreement to say the business is separate from future marital assets.

A post separation agreement can be drawn at any time of the marriage saying that the business is separate from jointly owned marital assets and will remain so after the divorce. However, in England and Wales courts do not have to take pre and post-nuptial agreements into consideration if they seem unfair. So, if the business has a high monetary value then a post-nuptial agreement giving one ex-partner the business in full may be seem unfair to the court. 

LINK TO OUR L.I.P HELP GUIDE TO PRE AND POST-NUPTIAL AGREEMENTS

8) HOW CAN A DIVORCE CLEAN BREAK ORDER HELP SAFEGUARD THE FUTURE OF YOUR BUSINESS?

A clean break court order is one that states that after the divorce neither ex-partner can make any claim on the future income of the other ex-partner.

A clean break order will allow the ex-partner who keeps the business to grow it without the worry that the other ex-partner can ask for a share.

LINK TO OUR L.I.P HELP GUIDE FOR FINANCIAL TERMS AND FINANCIAL ORDERS EXPLAINED (clean break order)