Whether a single or dual-earning household, a husband-wife family business, or professionals who own and operate their own practice, families come in all shapes and sizes, and their economic arrangements can vary. Just as these arrangements and lines of work each entail unique issues when it comes to divorce, so also can marriages which involve one or both spouses who are self-employed. In fact, self-employment can be especially problematic when it comes to finances, documentation, and ensuring a fair share of marital property.
Whatever the underlying issues may be in a divorce involving a self-employed spouse or two self-employed spouses, understanding your rights and how to protect them is critical to protecting your future. Below, our divorce attorneys at Coker, Robb & Cannon, Family Lawyers discuss a few important issues to consider when it comes to the impact self-employment can have on divorce.
1. Classifying Property & Valuation
An important concept to understand in divorce is that of community and separate property. Under Texas laws regarding property division, assets and debts obtained during the course of a marriage are presumed to be community property subject to division in divorce. Separate property, on the other hand, is that which was acquired by one spouse prior to marriage, or which was obtained through an inheritance or gift during marriage. A spouse who wishes to prove any asset as separate property will have the burden of doing so by clear and convincing evidence.
When it comes to self-employment, determining what is and what is not community property can become a tricky issue, and will be a matter that depends on the nature of the person’s self-employment, whether they started a business before or after marriage, when certain assets or debts associated with self-employment were acquired, among other factors.
Accurately valuing self-employment, a private business, and other financial aspects of a marriage is also an important, although complex, matter to address for the purposes of property division, and it requires:
- Thorough documentation and recordkeeping;
- Financial investigations/forensic asset tracing;
- Creative solutions to negotiate or mediate property division settlements (i.e. disproportionate shares of assets, offsetting with spousal support, buyouts, etc.);
- Gathering evidence to support claims of separate property;
- Evaluating the potential for litigation.
2. Income Inaccuracies
One of the key differences between a divorce involving a self-employed spouse and one involving a typical W-2 employee is the potential for inaccuracies in reporting income. This may lead to:
- Self-employed spouses misreporting income due to the nature of their work and finances
- Self-employed spouses concealing assets to tip the scales in their favor
- A spouse divorcing the self-employed individual inflating their partner’s actual worth or arguing the self-employed spouse earns more money than they actually do.
These issues create potential for property and spousal support awards which don’t reflect the true situation. However, issues over reporting income don’t have to be a concern when spouses can amicably communicate and cooperate. But that isn’t the case for everyone, nor is it always wise to believe a former spouse won’t put their own interests and future ahead of yours. Divorce cases involving a self-employed spouse demand a deeper examination into finances and may require the use of qualified experts or forensic accounting to trace funds, determine cash flow, and help with valuation.
What You Can Do – Ensuring accuracy when it comes to evaluating income and assets can be challenging, but parties involved in such cases can take a few steps on their own to protect their rights and interests:
- Gather documentation regarding self-employment, income, expenses, and business assets. Some of this information may be obtained from a record-keeping system used for a business.
- Work with an accountant or financial expert to gain a better grasp of a businesses’ value. Evidence provided through such means is more likely to hold up in court than estimated figures.
- Know and understand your rights, especially when it comes to obtaining information pertinent to a lawsuit. If there is available information and documentation about a spouse’s self-employment and finances, you have the right to obtain them by requesting them from your spouse, or working with an attorney who can help you pursue legal methods for doing so, such as a formal demand or subpoena to a third party.
Because there are difficulties in accurately determining income and the value of assets when a spouse is self-employed, there is also exposure to risks for hidden assets. It should be noted that hiding assets in divorce is never a good idea, as it can not only degrade one’s credibility to the court and impact the outcome of a divorce case when discovered but may also result in contempt or even criminal charges.
However, that doesn’t mean spouses with assets to conceal or hide will think it’s a bad idea for themselves, or that it doesn’t ever happen. In fact, there are some common places where divorcing spouses tend to hide assets:
- Friends and family members
- Custodial accounts
- Safe deposit boxes
- Luxury purchases
- Fake employee salaries
Fortunately, spouses have rights and options in such situations, and can work with attorneys to pursue the information, documentation, and accurate financial assessments they need. Attorneys can also help determine when a spouse may be under-reporting income, relocating assets, or concealing the true value of a business. Exposing hidden assets tied to self-employment can protect your rights in property division and spousal support matters and help ensure you’re not at a disadvantage.
4. Support Orders
Self-employment and business valuation issues can also be problematic when it comes to awards and negotiations over spousal support and child support. That’s because verifying self-employment income isn’t as simple as referring back to someone’s W-2s, and because it is far less predictable than traditional income streams, such as a salary. Additionally, self-employed individuals often have substantial business-related expenses, some of which may not be recognized as valid deductions for family law purposes as they are when filing income taxes.
Ensuring a fair outcome in support matters requires an understanding of a self-employed spouse’s real income and financial situation, or proving another spouse is overstating their partner’s worth in order to receive more for themselves. To protect your right to fair spousal support payments, ensure you are not ordered to pay more than you should, or secure the child support payments you need to care for your children, accurately evaluating the financial aspects of self-employment is crucial.
Divorce Representation Tailored to Your Needs
Since 1998, our Texas divorce and family law attorneys have focused on the personalized representation clients need to protect their rights and interests. Because we believe in the importance of working closely with our clients, and know each case requires a personalized and hands-on approach, we emphasize tailored legal strategies which address the unique issues they face. That can make a difference in cases with a self-employed spouse, and cases involving a range of financial circumstances, business arrangements, or disputes.
If you would like more information about Texas divorce and self-employment, call (940) 293-2313 or contact us online to request an initial consultation with a member of our team. Our firm proudly serves clients throughout Denton County, Collin County, and the surrounding areas of Texas.