Lately there have been more and more people leaving traditional jobs and taking consulting positions. Is a solo consultant considered a business to be valued in a divorce? Also, more companies have been treating employees as independent contractors asking them to set up an LLC to be paid. Is that LLC considered a business in a divorce? Finally, with the current changes in non-compete laws, we may actually see a shift back from companies who previously treated salespeople or other generators as independent contractors to making them employees. But still, is that a business? Is there goodwill? How do we treat this in a divorce?
In Seiler v. Seiler, 308 N.J. Super. 474 (App. Div. 1998), the husband operated an insurance agency exclusively representing Allstate. Id. at 476. The court noted, “It is undisputed that defendant is an employee of Allstate. He represents Allstate exclusively. His compensation is governed by an agent compensation agreement with Allstate. Pursuant to the agreement, all premiums collected by defendant are treated as in trust for Allstate. Premiums are remitted to Allstate without any deduction for commission or expenses. The accounts are owned by Allstate rather than defendant. Defendant does not have a “book of business” which he can sell.”
The question here was whether there was “goodwill” in the insurance agency owned by Mr. Seiler. The court held that there was goodwill, but it was Allstate’s goodwill. In other words, no one was seeking out Mr. Seiler because he had the best insurance, but rather, people were seeking out Allstate. Courts in NJ have held that, when future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, that goodwill may exist and it may have value – and that value may be subject to equitable distribution.
Goodwill is what we call an ‘intangible.’ In Piscopo v. Piscopo, 232 N.J.Super. 559, (App.Div.), certif. denied, 117 N.J. 156, (1989) Joe Piscopo was attributed goodwill to his celebrity status and that goodwill was an asset subject to equitable distribution in a divorce.
In situations where you have a solo consultant, or a small business with a singular client, the courts are going to look past titles to see whether the goodwill belongs to the individual or the larger entity. Some factors that the court will consider:
1. Is there an expectation of a future economic benefit from the asset;
2. Does the person have control over the pricing, hiring and firing of employees, in other words, does this operate like an independent business;
3. Who is the source of the clients? Do the clients come from the efforts of the individual or is the client a larger company? (For example, Mr. Seiler did not own the client list, Allstate did.)
4. What is the tax structure of the entity/person?
5. Can the book of business be sold?
Why do you care? If your spouse is a contractor or consultant, there may be a value to his/her business beyond the income it generates. Contact the lawyers at Baker Legal Group to discuss how this can impact your divorce, your share of the assets, and even the income assigned to your spouse during a divorce.
Seiler v. Seiler, 308 N.J.Super. 474 (App.Div.1998)
https://casetext.com/case/seiler-v-seiler-2
Piscopo v. Piscopo, 232 N.J.Super. 559, (App.Div.), certif. denied, 117 N.J. 156, (1989)
https://law.justia.com/cases/new-jersey/appellate-division-published/1989/232-n-j-super-559-0.html