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Running and Valuing the Family Business in a Divorce

Divorcing spouses have special duties of loyalty to each other, which also applies to any assets in which they have a common interest.  Observing these duties are particularly critical if you own a business, but especially a small business. The CARES Act loan adds a new layer of complexity to divorce cases. Here’s what you should discuss with your legal advisor.

special duty of loyalty (also known as a fiduciary duty) requires you to treat your spouse’s interests in your common property with good faith, trust, confidence and candor. In other words, both spouses must exercise a high standard of care in managing the property.

You must make management and financial decisions that benefit both of you. You cannot make decisions that are purely self-serving. For example, you cannot secretly invest profits from the business into ventures that only benefit you. You have to be candid about and transparent with the finances and management.

Provide disclosure and advance notice, and keep written records. It is a good idea to regularly provide bank statements, balance sheets and profit and loss statements to your spouse. Have your spouse sign all material documents (including tax returns and loan applications).

At a minimum, document by email or otherwise, that you sent your spouse the material documents. If you want to give a bonus or raise, acquire significant assets or contract significant debt out of the ordinary, let your spouse know in advance.

You have all of the obligations that you have in general that are detailed above. In addition, after a divorce is filed, you cannot transfer, encumber, conceal, sell or otherwise dispose of joint or common assets, except in the ordinary course of business. You must obtain court permission or your spouse’s agreement in advance. If you have any doubt whatsoever about taking an action, assume that you should obtain permission and make the necessary disclosures.

Yes, if the property was acquired after marriage with community funds or you worked in the business after marriage. Read more in our Spousal Support post.

There is nothing in the CARES Act that prevents divorcing parties from applying for stimulus payments.

Read the fine print. Without court permission or mutual agreement of your spouse, you act at your own risk. You cannot encumber common property during the divorce. That means you cannot obligate the business to repay the loan (you may obligate yourself personally).

However, the Payroll Protection Program (PPP) does not require you to collateralize the loan, which means that you are technically not “encumbering” the business. The PPP also does not require a personal guaranty. If anything, you are adding value to the business, and as long as you use the loan for covered expenses, it will be forgiven. Check with your legal advisor for advice specific to your case. However, if in doubt, extreme caution is advised.

It is hard to give a simple answer to this one. There is no real value in the loan proceeds themselves because they have to be repaid –  unless they are used for covered expenses and forgiven.

In other words, in a lot of cases, it is a wash. Where it gets interesting, though, is in cases where the business keeps its revenue stream up, but uses the loan proceeds for covered expenses – which are later forgiven.

The income that the business is able to save during this time is a “windfall”. The person who is awarded that business then owns that windfall unless the court orders otherwise. Be sure to make a claim for any windfall.

It depends. The court has a lot of discretion with deciding what date should be used to determine the business value. Before COVID-19, it was common for the court to order the business be valued when the divorce was served. With the financial devastation produced by the virus, however, in many cases, this can produce a harsh and unfair result. As you can see, the date of business valuation is critical. You should discuss this thoroughly with your legal advisor.

Read more in our Spousal Support in Arizona post and our Splitting the Family Business post.

Disclaimer: These tips are just intended to highlight certain aspects of the Stimulus package that may be helpful to small business owners and is not intended to be a substitute for your tax professional’s advice. McCarthy Family Law is not an accounting or tax firm. You should check with your accountant for more information.

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McCarthy Family Law is a full service family law firm that services all family law issues. If you are going through a divorce or have questions about filing for divorce, we are here to assist you. Please call us at 520-623-0341 to explore your options. Turning Stress Into Solutions®.