Child Support Taken from Retained Earnings of Business

When a business owner in Pennsylvania owes child support, he or she may consider whether to include the retained earnings that are not distributed to owners in calculating child support.  A recent decision of the Superior Court (non-precedential) answers this question by making reference to a previous child support decision.  In M.J. v. S.J., No. 747 WDA 2013 (July 16, 2014), the owner of a consulting business organized as a Subchapter S corporation argued that retained earnings should not be included in his income when calculating child support. His argument may have had merit, but perhaps he did not submit the necessary evidence to protect his retained earnings from the child support collector.

The Superior Court in this decision mentioned Fennell v. Fennell, 753 A.2d 866 (Pa. Super. 2000), a case in which retained earnings were excluded from the income of a shareholder who owned a minority interest in the business. Fennell established different standards for majority and minority owners of business, creating a presumption that a minority owner does not have the prerogatives of control necessary to compel the business to pay his or her share of retained earnings.  A majority owner, on the other hand, has a higher burden of proof.  The majority owner must prove that there is a legitimate business purpose why a business cannot distribute its profits to the owner, such as the need for capital to acquire equipment or supplies.  Additionally, a business owner might want to demonstrate that retained earnings were earned in prior years.  There is case law holding that income earned in the past cannot be used for child support purposes in the present.