Sometimes, a closely held business will keep some of its profits rather than distributing them to its owners. Those “retained earnings” might be used to cover operating expenses, expansion efforts, equipment needs or even to manage seasonal cash-flow fluctuations. When an owner divorces, however, those retained earnings can become an issue – particularly when the business has been set aside as that spouse’s separate property via a prenuptial or postnuptial agreement.
The spouse who owns the business may argue that the money belongs to the company. The other spouse may allege that profits are being purposefully held back just to keep marital funds hidden so they won’t be divided in the divorce. They may also accuse the owner-spouse of trying to reduce their visible income to reduce how much spousal or child support they may pay.
Control and purpose matter when it comes to retained profits
In general, the court may look at several different factors to determine how the earnings will be treated. For example, the legitimacy of the reason given for retaining the earnings may need to be examined, as well as the history of the company. If similar shares of the earnings have been routinely retained over the years, that’s less suspicious than when the practice is new.
Another issue is whether the owner-spouse has the power to decide when profits are distributed. A sole owner, for example, is going to have more ability to decide whether money gets folded back into the business than a minor shareholder.
Tax returns alone may not show whether retained earnings are reasonable. Corporate records, bank statements, distribution histories, budgets and capital expenditures can provide important context. A valuation expert will likely be needed to speak to the accurate worth of the business.
Whether you own the business or believe your spouse is using one to conceal available income, an experienced Ohio family law attorney can work with financial professionals to determine how retained earnings should affect the division of property and any potential support award.