Own a “Cash Business”? Points to Consider in a New Jersey Divorce

If you and/or your spouse own a cash business and are facing the prospect of a New Jersey divorce, it will be necessary to consult with a Freehold divorce lawyer before determining how best to proceed. That’s because cash businesses can be more difficult to accurately value for purposes of equitable distribution, per NJ Rev. Stat. 2A:34-23.1. It’s also problematic if the business owner in any way fudges the numbers to pay less in taxes. That’s a possibility with any business, but it’s tougher to track with a cash-based company.

For those who may be unfamiliar, a cash business is one that runs primarily on cash transactions. Examples of businesses that are primarily cash-based include: Coffee shops, bakeries, bars, street vendors/food trucks, lawn care/landscaping firms, babysitters, laundromats, errand services, auto services, nail salons, dog training, freelance writing, art vendor, personal training, etc. Some of these may also be considered “casual businesses,” in that they may accept debit or credit cards, but cash is welcomed and sometimes preferred. Cash businesses may not only primarily receive cash payments, but also make cash payments to vendors, employees, etc.

Some potential legal issues to consider:

• Unreported income. If there is even a possibility of a client’s unreported income, we may strongly suggest an alternative dispute resolution, such as private mediation or arbitration. That’s because as noted by the Journal of the American Academy of Matrimonial Lawyers, Judges may have an ethical obligation to report “under the table” income or other evidence of tax evasion to the Internal Revenue Service. (In New Jersey, this is referred to as the “Sheridan rule.”) With closed-door arbitration, both sides are able to speak more freely about the cash-based business.
• Determining actual income. Even cash business owners who do their best to have everything on the up-and-up may have a tougher time tracking their gross and net pay, liabilities, and overall value of the business. Working with a forensic accountant to conduct a true cash flow analysis and/or the family’s average monthly budget can help establish the marital lifestyle.
• Valuing the business for equitable distribution. If you own a business, particularly one you started or grew substantially during the marriage, your spouse may have a right to a portion of its value. In the case of long-term marriages, Courts will often give up to 33 percent of the business value to the former spouse. More often what happens (particularly with cash businesses) is that the owner retains the business, and the spouse’s share is offset by receiving a greater share of another asset. In order to ensure fairness, though, the business must be accurately evaluated.

Why Mediation Makes Sense for Divorcing Cash Business Owners and Spouses

As previously mentioned, mediation or arbitration allows both parties to more freely lay their cards on the table, as there is the promise of confidentiality. It’s worth noting too that just because one party is formally the owner of the business, you may both face legal trouble if your taxes were filed jointly.

Mediation allows you to negotiate frankly on matters pertaining to taxes, income, alimony, child support, and equitable distribution. You will be allowed to work out an agreement that deals with the actual numbers and benefits at hand.

Mediation is also typically less expensive and time-consuming. For small business owners, that alone can be invaluable.

If you own a cash business or your soon-to-be-ex does, it’s worth discussing alternative dispute resolution with an experienced divorce attorney in Freehold, NJ.

Contact our Freehold Attorneys at (732) 377-3367 to schedule an appointment.