Family Law

OWNER, KNOW THY BUSINESS

By Fox Rothschild

Today was a support trial.  We represented the regular wage earner.  The wife was the owner of a small business. She was suing for support. The business had seen a 40% growth in revenue but wife contended that she could not make more than a $1,000 a month, less than half of what she was paying her only full time employee after five years of operations.  So, the numbers did not make sense.

Sometimes the numbers don’t add up. Many people start small businesses without any clue about how to make a living from what they do.  Many others don’t hesitate to conflate business with pleasure by using the business to pay personal expenses.

Rare is the instance where attorneys get to advise the client about how to handle the business records before they are sealed into reality by submission to taxing authorities or lenders. If we could, we would tell clients to sit down with their accountants and clean the books to reflect the economic reality of what really occurred.  Nothing is more painful to a trial lawyer than to watch opposing counsel take their client apart, like removing the wings from a fly, as each bogus transaction and accounting game is exposed in excruciating detail before the Court.

Almost as bad is the client who has no understanding of how his or her business records work. A businessperson who does not understand how his or her records work looks stupid or dishonest or both. As attorneys we commonly make the mistake of assuming that clients understand accounting and tax law when they are not conversant with either.  As a client, take a look at your tax returns and your financial statements as well as your books of original entry.  If you don’t understand what you are looking at, it’s time to insist that your accountant step in.

If you enlist the services of an accountant, insist that the accountant play devil’s advocate.  How will the other side look at the books? Is it time to cleanse the books rather than allow the opposing side to pick your books apart on their terms?  Sadly, this may also mean that amended returns may need to be filed. But an amended return is better than a “tip” to the service from a presiding judge.

Above all, if you own your own small business or have an investment in one, don’t just let matters rest.  Look at your books, your tax returns and your financial statements.  Ideally, learn what they are about.  You are the best advocate of their accuracy.  But, if accounting is not your game, let the professionals do it and let them tell you where questions will arise.

Full post as published by Pennsylvania Family Law on September 28, 2008 (boomark / email).