Distributions off LLC to one spouse, but not the other?

[DecentDad]

Hi Soc,

Welcome back from vacation.

My wife is considering registering an LLC for a home-based retail business, now that she's a stay-at-home mother with our infant and has taken extended leave with her employer.

Over the past couple years, I dabbled in this type of business as a "hobby" (no income ever reported, and nobody except my wife knows that it was my hobby as a test to see if it could be profitable) and will be an unpaid advisor to her.

I will maintain my full-time employment until the LLC can support our entire household (if ever).  Also, I have some self-employment contract income in my field of work (which is reported on my returns).

Unless it's time to quit my full-time employment, there will not be evidence that I do any work for the LLC.

In the foreseeable future, my wife's SS# will be the recipient of all distributions from the LLC.  She'll pay all taxes, sign all the documents, etc.

For the first couple years at least, the income off the LLC will be less than the full-time salary that wife earned prior to baby's birth.

Finally, my wife and I file separate tax returns.

1.  If I maintain full-time employment with at least the same earnings as in the past, and if I'm not on paper as being any part of the LLC, will it be nearly impossible for biomom to argue that any part of the LLC's net revenue should be considered in CS calculations?

2.  If I'm not on paper as being any part of the LLC, and if I deny any substantial involvement in it, can any of its records be requested in discovery?

Thanks,
DD

[socrateaser]

>1.  If I maintain full-time employment with at least the same
>earnings as in the past, and if I'm not on paper as being any
>part of the LLC, will it be nearly impossible for biomom to
>argue that any part of the LLC's net revenue should be
>considered in CS calculations?

Big bag o worms.

The general presumption of CA law is that all income acquired by either spouse during a lawful marriage while domiciled in CA is COMMUNITY PROPERTY (50/50).

The presumption may be rebutted by showing that the income was derived from the separate property of a spouse owned prior to marriage (e.g., investment capital into a new business), or that the property was obtained by gift or inheritance during marriage, or is the rents, issues or profits thereof.

So, you can enter into an agreement stating that the income of the LLC is your spouse's separate property, and as long as all of the assets are maintained in accounts over which you have no legal authority to withdraw, then your ex cannot reach it for child support purposes, as long as you are working full time.

However, if you volutarily stop working and live off of your spouse's earnings from the LLC, then the court will impute your earning capacity, and it can also use your spouse's income as a means of determining your support obligation, to the extent that you are living under the umbrella of the income she provides.

The other parent cannot reach that corporate income, if it is deemed your spouse's separate property, however, the court can order yo to continue to pay support, find you in arrears, and even throw you in jail until you pay off the arrears or find a job.

Also, even if all of the start-up capital for a busines is separate property, your spouse's personal effort to that business is considered community property. The court uses a formula to determine what portion of the business value is community and what part is separate (i.e.: CP = Fair Market Value of business at date of determination - SP value of business at date of marriage or inception *1.10 * years of business operation during marriage). However, if you are specifically agreeing to have no interest in this business, then the formula won't appliy.

The court will almost certainly see this as an artifice to avoid child support and refuse to enforce your agreement to the extent that the child is harmed.

Ultimately, if there's money to be had, the other parent can get it, unless that money is located in the Cayman Islands, or under your matteress.

>2.  If I'm not on paper as being any part of the LLC, and if I
>deny any substantial involvement in it, can any of its records
>be requested in discovery?

Yes, the LLC can be joined as a separate party to the case, for the limited purpose of discovering income, expenses, assets and liabilities.

[DecentDad]

Wow.  Okay.  That is a bag of worms.

Here's how I see it playing out:

Let's say I maintain full-time employment and my annual net income reliably increases more than 0% per year, and my material quality of life doesn't change substantially.

Let's say that wife's income from the LLC (i.e., which would be the entire net revenue of the LLC) is less than her past full-time employment.  If stay-at-home wife alone was suddenly earning 7-digits against my relatively meager income salary, I could see the case, but it won't ever be that.

When I fill out an I/E declaration, I'm honest about the income reported for my SS# (supported by my tax return and paycheck stubs), and I'm honest about the income my spouse earns (i.e., reported for her SS#, though not supported by tax return on the I/E declaration since we file separately).  I'd continue to be honest about the income my wife makes from this new company (though the I/E declaration doesn't require that I specify income sources for my spouse).

BTW, we're in post-judgment.

I've seen the cases in court where the numbers don't match the obvious situation, and I see all the discovery issues involved to learn the truth.  Heck, you even helped me successfully argue that my ex's $3000/month declared expenses don't match her $400/month declared income.  But my situation isn't ever going to be that "things don't add up" scenario.

1.  So... in practice, how/when could an attorney propound such probing discovery of my wife's income sources without any evidence that my income has substantially changed, no evidence that my household expenses have increased, and no evidence that overall household income has increased substantially?

Thanks

[socrateaser]

>1.  So... in practice, how/when could an attorney propound
>such probing discovery of my wife's income sources without any
>evidence that my income has substantially changed, no evidence
>that my household expenses have increased, and no evidence
>that overall household income has increased substantially?

First, as an aside, if you don't know your spouse's income, then you can state so on the I&E. It may raise some eyebrows, but it's entirely lawful considering you file separate returns...there's no reason why your spouse must disclose her income to you.

Evidence is discoverable if it is "reasoanbly calculated to lead to the discovery of admissible evidence." This means that even if the evidence sought is irrelevant to the case, if that evidence reasonably leads to the discovery of admissible that "is" relevant, then it's discoverable.

This casts a very broad net over what can be requested in a discovery request -- not limitless, but very far and wide.

The general principle lf CA child support is that both parents should contribute to the child support according to their "respective stations in life." So, the fact that your income has not apparently changed, and that your household expenses have changed can be dwarfed by the fact that one parent lives in a single-wide trailer in the Imperial Valley, and the other lives in a 5,000 sq. ft. ocean view home in Palos Verdes Estates.

In the case of In re Castle, the father inherited a large sum of money and proceeded to pay off all of his debts. His living situation did not change at all, but he no longer owed any money on his home.

The court determined that by eliminating his expense, the father had inversely increased his income. How does this apply?

If your spouse starts earning such that you can move into a substantially nicer abode, but your expenses don't change because your spouse is contributing an inordinately large proportion of the cost of living, then the court could simply find that you are receiving an equitable benefit of your spouse's earnings, and the child is entitled to be supported appropriately, so that your new station in life is represented in the child's living circumstances.

There have been child support awards granting staggeringly large sums to the custodial parent, where the disparity of lifestyle was "substantial."

This means that your spouse's income, although statutorily disfavored for use for directly calculating child support, could reasonably be characterized as providing you will such a large personal benefit as to change your station in life, thus, your income should be imputed, and therefore, your spouse's finanical info could be discovered -- not from you directly, but by moving to join her LLC as a party (or just subpoenaing her to a deposition), and then obtaining the discovery -- because it's "reasonably calculated to lead to the discovery of 'admissible' evidence."

[DecentDad]

.