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Divorce & Family Law This forum is for discussing any of the legal issues involved in your divorce.

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Old 10-15-2015, 03:22 PM
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Default Retained Earnings

Hi there,

I will be headed into a settlement conference soon and was wondering if anyone knew how retained earnings works?

In short my ex claims to make 80K. After over a year she has shared some of her financials (not all). At the end of the day her corporation makes $160 - $180.

she has about 100K in retained earnings. She says she needs to keep it there in case she loses her job. She has no employees and works off-site with clients, not sure why it needs to be there. Can this be added back to her income? why can't this be counted as part of child support?

anyone have experience with ex's who own a corporation?

thank you.
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Old 10-15-2015, 05:50 PM
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My understanding is - it depends.

a - it depends on what the industry standard is for retained earnings. If a corporation has high overhead, it makes sense to retain more capital in case of lean years. If it is a low overhead industry, than it doesn't need the capital in the accounts.

b - what has the corporation historically done. When you were together, did the ex routinely keep a large amount in the corporation (if they were doing that business when you were together)? If so, than that is likely the norm. You still could get it imputed into their income if their industry doesn't require the capital to be retained, but you may need some sort of expert to testify to that. You may be able to argue it yourself if the ex's financials are fairly clear and they don't have many expenditures. But whether you are successful would depend on how well you can articulate it and how much you educate yourself on her industry.
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Old 10-15-2015, 07:54 PM
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The reason she gave answers the question 'why don't you spend that $100k'. It does NOT answer the question 'why is it being kept within the corp as retained earnings instead of being paid out as your wages.'
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Old 10-19-2015, 09:59 AM
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Her argument in her response was that she is required to keep the funds in the account while she is in between contracts. However, she has never been out of work as long as I have known her. She consults, no office space other than her house and has no employees. So I don't see a reason that money cannot be used for child support purposes. I wonder if the judge will buy that argument.
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Old 10-20-2015, 11:15 PM
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Assuming this isn't her first year of work, you need to get at least 3 years of financials from her corporation (or more if the income is highly variable). As others have stated unless she has a history of maintaining this level of retained earnings it's worth exploring imputing the income to her.
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Old 10-21-2015, 10:00 AM
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The last 3 years it looks like she has kept between 80 - 100K in retained earnings. So does that mean I am SOL in trying to add this to child support calculations. I can understand if she had employees or large office space or capital purchases. But she has none of these so why not pay yourself out. It looks like she was smart to do it this way I suppose, now she can withhold 100K instead of using that to pay child support all because according to her it is her cushion in between contracts. Seems unfair if it is just sitting there for no reason other than to avoid increasing child support payments.
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Old 10-21-2015, 10:32 AM
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Does that mean her company is gaining between 80-100k every year?
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Old 10-21-2015, 10:42 AM
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I believe the onus would be on your ex to prove that she needs the 100k slush-fund for business purposes. A one-woman real estate person (assuming that is her occupation or something similar) with little business expenses and no employees? She may have had the luxury of having this little rainy-day fund when the marriage was intact but now that you are not together it is entirely something else. Hope you also look at adding non-essential business expenses that she has likely claimed on income tax return, to her income for purpose of determining income for child support.
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Old 10-21-2015, 02:07 PM
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It doesn't look like a gain every year. It looks like it just sits there every year as per Arabian her "little rainy day fund".
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Old 10-23-2015, 01:09 PM
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Quote:
Originally Posted by mcj2012 View Post
It doesn't look like a gain every year. It looks like it just sits there every year as per Arabian her "little rainy day fund".
Retained earnings on a balance sheet does not mean that the sum is sitting in an account somewhere untouched. Retained earnings is the money the corporation has earned in previous fiscal years. It has been disclosed on the corporation tax return, and income taxes for the business have been paid on those earnings. As with people, businesses tend to spend some of what they earn in order to increase operations, update operations, hire staff. Retained Earnings is a balance sheet item, not a cash account. The cash account should be the first item on the balance sheet. That represents the liquid money available to the company at any given time. Without retained earnings, the balance sheet would never balance.

If the business is in fact a corporation, the only way to take funds from it is through payroll (then personally taxed) or through a shareholder draw. Otherwise, the retained earnings belong to the corporation, not the owner of it.
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