Divorces With Sole Proprietorships

By Beverly Bird

Divorce issues such as support and property division can be pretty clear-cut when a spouse works for someone else and his income is reported on a W-2. However, when he's a sole proprietor, this can muddy the waters. A sole proprietor's business is his personal business. There's no line separating the two, nor a specific entity, such as a corporation or partnership, with which the court must deal.

Divorce issues such as support and property division can be pretty clear-cut when a spouse works for someone else and his income is reported on a W-2. However, when he's a sole proprietor, this can muddy the waters. A sole proprietor's business is his personal business. There's no line separating the two, nor a specific entity, such as a corporation or partnership, with which the court must deal.

Personal Expense Add-Backs

Sole proprietors typically take money from their business accounts as their paychecks -- and some may also pay personal expenses from business funds. When determining income for support purposes, the court adds these personal expenses back to the business's revenues. Necessary and reasonable business expenses and taxes are usually the only permissible deductions from a sole proprietorship's gross revenues. The balance – not any draws he may take – counts as his income. If a certain expense is not necessary to do business, the court considers the money as income available for calculating child support or awarding alimony. For example, if you regularly make your $400 car payment from your business account, that comes to $4,800 a year. This counts as income to you, just as it would if you worked for someone else, collected your paychecks and then used your paycheck to make your car payments.

Divorce is never easy, but we can help. Learn More

Distribution of Assets

Because a sole proprietorship isn't a distinct business entity, separate from its owner, it doesn't own its equipment, supplies or assets – the business owner does. Therefore, they're considered marital property in a divorce, assuming they were purchased after the date of the marriage. For example, if you're an artist, your spouse is technically entitled to a share of your paintbrushes, easels and other supplies. If you operate a restaurant, a portion of the appliances, furniture and equipment is hers. As a practical matter, the court won't make you count up all your paintbrushes and give her half of them, but your spouse is typically entitled to other marital assets of equal value.

Valuing the Business

Valuing a sole proprietorship is complicated and usually requires the assistance of an accounting professional. Your business's value includes its equipment and your supplies, but it also encompasses your accounts receivable and even contracts. If you own a restaurant, the money in the till contributes to the value, as does the deal you made with a local organization to cater five events a year, even if the events haven't yet occurred. Goodwill also contributes value – the reason customers and clients come to you in the first place. Some states, such as Texas, draw a line between professional goodwill and commercial goodwill. If customers flock to your restaurant on Friday nights for your wings special, this is commercial goodwill as it's related to your business entity. If you're a writer or artist and clients hire you for your skills, this is professional goodwill because you personally produce the work and it cannot exist without your talent. Some courts have ruled that commercial goodwill is a marital asset in divorce and contributes toward a business's value, whereas professional goodwill does not.

Spousal Contributions

Another issue arises if your spouse contributed effort or labor to establishing or maintaining your business. For example, she might have waited tables in your restaurant for years just to help out, never drawing a paycheck. If so, she's usually entitled to some compensation for this – if not cash, then additional marital property. If your sole proprietorship is based entirely on professional goodwill, however, valuing any contributions your spouse made, such as caring for the home while you toiled away at your easel, can create murky waters. You may need the assistance of an attorney to protect your rights.

Divorce is never easy, but we can help. Learn More
What Amount of Business Income Counts Toward Child Support?

References

Related articles

Sweat Equity in Divorce Cases

Sweat equity means the same thing in marriage as it does in any other endeavor -- you may not invest hard-earned dollars, but you make contributions all the same through labor or other intangible efforts. When spouses divorce, sweat equity can have more of an impact in equitable distribution states than community property states. Marital assets are usually divided between spouses 50-50 in community property states, without accounting for a variety of factors that might make this distribution unfair. In equitable distribution states, courts weigh several issues to try to come up with a division of property that's justified based on the facts of the particular case.

Divorce & Joint Ventures

Spouses co-owned and operated more than a million businesses in the United States in 2011 according to the National Federation of Independent Business. It’s safe to say that some of those spouses may divorce and business ownership can confound the already difficult process of dividing assets and debts when spouses part ways. However, joint ventures are sometimes easier to deal with than other partnerships or businesses. Technically, a joint venture is something of a one-time event.

What to Take to the Attorneys Office When Filing for Divorce

Beginning your divorce can be a little like a scavenger hunt. Although it’s not required that you supply your attorney with documents you haven’t looked at or even considered in years, it will usually save you some money if you do. Alternatively, your attorney would have to gather the paperwork through legal channels, such as by issuing subpoenas. Because divorce attorneys usually charge by the hour, it will help keep your divorce costs down if you can do this work yourself.

Get Divorced Online

Related articles

Spouse's Rights to Property Owned by the Other Spouse Prior to the Marriage

Identifying a spouse's separate or non-marital property is one of the more complicated aspects of divorce. While hard ...

How to Figure Out My Income From My Sole Proprietorship

A sole proprietorship is a business that is an extension of its owner. As a sole proprietor, you are personally ...

Can I Convert From Sole Proprietorship to a Hobby?

Because a sole proprietorship doesn’t require the creation of any formal business entity, it isn’t ...

What Assets Are Protected From Divorce Settlements?

Divorce courts in all states recognize that some property is solely yours, immune from distribution in a divorce. If ...

Browse by category