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.

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.

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.

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

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
Sweat Equity in Divorce Cases


Related articles

Base Salary Vs. Equity Split in an S-Corp Partnership

Business owners are able to also work in their business as employees. This means they can earn wages or base salary, as well as their share of net profit from the business. An S corporation is a special type of business entity that has a favorable tax treatment by the Internal Revenue Service. As part of its pass-through tax status, it is required to treat all of its owners equally. However, there is no requirement that its owners work as paid employees for the S corporation in equal amounts or for equal compensation, or at all.

Sole Proprietorship & Retained Earnings

Small business owners that organize as sole proprietorships enjoy fairly simple accounting and tax-paying chores. Like any other business, a sole proprietorship earns revenue, pays expenses and calculates net income on the difference. Sole proprietors should also keep track of their retained earnings -- the portion of profit that is kept in the business and not paid out to owners, employees or investors.

Is a 1099 Required for an LLC?

A limited liability company, or LLC, is a relatively modern business organization that provides business owners with a great deal of flexibility in management and taxation. The IRS does not have a specific designation for LLCs, so owners may elect partnership taxation or corporate taxation. But the IRS does have requirements regarding independent contractors. Therefore, LLCs that use independent contractors or other professional services typically fall within IRS 1099 requirements.

Get Divorced Online

Related articles

What Amount of Business Income Counts Toward Child Support?

If you have children, calculating child support is an inevitable requirement of any divorce. If you'll be the ...

Deduction Categories for a Sole Proprietor

A sole proprietorship is just a business owned by a single individual. The earnings, expenses, profits and losses of a ...

Divorce & a Spouse's Cash Income

If your spouse earns some of his income through cash sources -- for example, if his business deals mostly in cash or ...

Sole Proprietorship Business Deductions

Despite the fact that a sole proprietorship isn’t treated as being a separate and distinct entity from its owner, the ...

Browse by category
Ready to Begin? GET STARTED