Deposition questions about the family business for the business owning spouse

A divorce lawyer will ask detailed questions about any family business in which either spouse is involved when taking the opposing spouse’s deposition. The following deposition questions are designed to be directed by the lawyer for the non-business owning spouse to the business owning spouse. See also Questions for the uninvolved spouse.

The goal is to uncover an accurate picture of the true income derived from the business, including all cash, compensation and perquisites, which, almost invariably, has created and sustained the parties’ life style. Compensation can be hidden in any number of clever ways, including repayment by the business of shareholder loans, loans from the business to shareholders (viewed with disfavor by the banking community when found on corporate financial statements), distributions of retained earnings, and tax reimbursement agreements where a shareholder’s income taxes attributable to profits that flow through the business to the shareholder’s personal returns are paid by the business.  These agreements typically provide that the shareholders who don’t need “reimbursement” simply get a similar distribution to use for whatever purpose they choose.

Acquisition

  • How did you acquire your interest in the business?
  • If you purchased or founded the business, what was the source of the initial funding?
  • If you took out a loan, how was it repaid, and from what accounts?
  • If you acquired the business by gift or inheritance, was it in a single transaction or multiple gifts?
  • Were gift or estate tax returns filed by transferor?
  • Were appraisals prepared at time of transfer?

Organization

  • How is your business organized: corporation, partnership, other?
  • What is the nature of your interest and your percentage of ownership?
  • What is your official title?
  • What are the names, addresses, titles, and percentage interests of other owners?
  • Identify accountants, lawyers and other professionals who provide services for the business?
  • How, where and by whom are the business’s books and records maintained?
  • Identify software (Quicken, etc) or other electronic media used?
  • How frequently are reports generated and by whom?
  • Are they audited?  By whom?
  • Who prepares the tax returns?
  • Who keeps the bank records?
  • Does the business have any outstanding loans from or to shareholders?

Nature of the business

  • Where is your business located?
  • Do you own the location or rent it?
  • Who are your major competitors?
  • What is your market niche?
  • Who are your customers?
  • How much are your accounts receivable/payable?
  • How many employees do you have?
  • How much is your annual payroll?
  • Describe the involvement of your spouse in the business operation?

Income and accounting for income

  • Do you accept cash? Checks? Credit cards?
  • How are receipts accounted for and reported?
  • Who is responsible for tabulating and depositing?

Command, control and management

  • Who makes the key business decisions?
  • Are any other owners involved in decision making?
  • Does the business have any key man, buy-sell, income tax reimbursement and other owner/shareholder agreements?

Corporate debts and obligations

  • How and for what purpose were these debts incurred?
  • What funding source was used for their repayment?
  • Prepaid obligations-are significant taxes being paid which will generate post-divorce refunds?
  • Have corporate debts been incurred to pay personal expenses?
  • Is debt being incurred to fund extraordinary equipment or asset purchases?
  • Are loans being received from or repaid to the last generation of ownership?

Compensation

  • Who determines your compensation?
  • How is it determined?
  • What is your total annual salary, distributions, dividends and draws?
  • If you don’t control your own compensation and benefits, are you being treated differently than other owners?  If so, why?
  • What perquisites are provided to you:
    • A vehicle or vehicle allowance?
    • Corporate credit card for personal use?
    • Country or other club membership and expense payment?
    • Use of corporate condo, airplane or other assets for personal purposes?
    • “Business” trips?
    • Trade or professional shows?
    • Entertainment?
    • Sports, theater, music venue boxes and tickets?
    • Other?
    • Are any of your personal expenses paid for by the business?

Benefits

  • Does the business provide you with:
    • Health insurance?
    • A medical reimbursement plan?
    • Retirement plans?
    • Life insurance premium payment?
    • Disability insurance premium payment?

Valuation issues

  • Has an appraisal or business valuation been done?
  • By whom and for whom?
  • Have there been any ownership interest sales or purchases in last five years?
  • Have there been any offers to purchase all or a portion of the business or its assets?
  • Why or why not accepted?
  • Your opinion of the value of the business?