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Wednesday, October 20, 2010

Income of a Self Employed Party

When one party is either self-employed or has an ownership interest in a business, there are two issues that arise in a divorce case. The first is the parties actual income for child support and spousal maintenance purposes, and the second is the value of the business interest for property division purposes.

Frequently it is critical to determine the income issue first, as it is not uncommon to go to court within a few weeks of filing to determine child support and spousal maintenance in temporary orders. Support is primarily based upon the need vs. ability to pay, and the parties income is a critical component to the ability to pay.

It is not uncommon for a self employed person to understate their income. This can be done in a number of ways, including:

  • Payment of personal expenses from the business (such as auto expenses, phone and other utility bills, insurances, entertainment, food, etc.).

  • Unreported income like cash payments.

  • Money paid from the business to someone else (like parents, children, girlfriends, etc.) for services never rendered, that may eventually be given back.

It is critical to get as much information and documentation as soon as possible. It the client has access to business records, this is quickest and least expensive method. If not, the information can be subpoenaed (income statements, balance sheets, statement of accounts, tax returns, check registers, bank statements, etc.). Also the personal bank records can show unaccounted for deposits (presumably unreported income). Loan and credit card applications are also useful, as the parties state under oath what their income is (and for loan purposes, they tend to overstate the income while for court purposes they will understate their income).

Determining the income of a self employed person can be difficult, because they frequently have a lifetime pattern of hiding their income. There is a wealth of information contained within the financial documents that an experienced business mind can help organize and asses. If your spouse is self employed and has potentially hidden their income, you should consider discussing your case with an experienced family law attorney.

In my next post, I will talk about small business valuation.

The Renton law firm of Mogren, Glessner & Roti, represents clients in a variety of family law cases. Please visit our web page at Renton Divorce Lawyers for more information.

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