In a California divorce, the property you own before marriage will typically remain yours after the marriage ends, commonly called separate property. Likewise, suppose you own a business before getting married and still own it, and you get divorced from your spouse.
The total business value might not remain your separate property, depending on the circumstances. In other words, if you decide to sell your business during a divorce, several decisions must be made.
Total income and debts obtained during the marriage are generally considered marital belongings, including the family business. Properties acquired by spouses before marriage are separate and not under equitable distribution.
Businesses in California are subjected to being divided equally during a divorce, along with debts and other assets. A spouse can sell their business during a divorce. This is especially true if the company is not considered marital property.
But, if your spouse has ownership rights, you will be required to compensate them for the sale of the business. The compensation is related to the equitable distribution principle, where the business value should always be divided fairly.
The business evaluation process is essential to determine the property's actual value. In some high-value business cases, the business might even have legal representation to protect its interests.
To determine the equal distribution in selling a business, debts are also considered because a spouse is not just entitled to the assets. A California family law court will determine the division of a business. Spouses can also reach a mutual agreement on how to divide the company's value. This article by our California family law and divorce lawyers will examine this topic in greater detail below.
What About Business Ownership Rights and Valuation?
If your spouse has no ownership rights in the business, you can sell it before the divorce has been finalized. The formal filing for divorce does not impact your decision-making power as a business owner. However, readers should note that most California family law courts will consider the business as marital property, meaning you will still have to compensate your spouse for a share of the company.
Most small family-owned businesses are shared between spouses. This means you can't sell the company without their consent. California courts will generally divide the value of a business equally, but other factors are considered, such as the length of the marriage and the spouse's income.
Suppose the non-owner spouse is entitled to part of the business. In that case, they can have it valued by a professional business appraiser familiar with identifying and applying the proper type of valuation for the particular company, including the fair market value.
These business valuation appraisers will examine a range of information, such as inventory and tax returns to inventory to determine the company's value. Your spouse could prevent you from selling your business if they obtain an order from the court restraining you while the divorce is pending.
Suppose your spouse can convince the court that their share of the company is in danger of being depleted or damaged before the final divorce. In that case, the court will likely temporarily restrict you from selling, transferring, or compromising the business until the divorce is over.
Divorce of a Business Owner in California
As noted, California considers businesses created during marriage as community property. The spouse who is not the owner is entitled to half of the business value while dividing assets.
Often, divorcing a business owner gets complex in a hurry. For example, how a spouse handles the business can significantly impact spousal support, child support, and tax considerations. Here is a list of valuable tips for divorcing business owners:
- Business owners will often undervalue or make efforts not to disclose all relevant documentation related to assets. They will shield assets in secured accounts.
- Most businesses can't survive if they are forced to split half the value, which will impact support obligations. Reaching a mutual agreement on a buy-out is often a better option.
- While negotiating for your fair share of the business in a divorce, you should consider a buy-out of property rights and be reasonable with your demands, as an agreement between spouses is almost always the best solution.
- Don't focus on revenge or act out of spite to hurt your spouse. Focus on the assets and what is in the best interest of your children.
- You should retain a divorce lawyer who has experience with business asset division and an ability to identify when a business owner is attempting to hide assets in a divorce, which is expected.
- You should always consider how a divorce will impact your tax status. It's common for spouses not to consider tax implications of assets in a business owner's divorce, such as appreciation and depreciation.
Business arrangements, especially in a high-value company, are complicated. In a situation where you and your spouse started a small mom-and-pop family business while married, then dividing the value is a divorce straightforward.
However, many businesses are large and complex, located in giant buildings with hundreds of employees. Divorces, where a spouse owns a large high-asset multi-million-dollar business, will require retaining the services of a forensic accountant who can determine the value of the community property in the business.
Further, in some divorces, the spouse is a business partner who will have to decide precisely how the business will remain while the assets are divided.
Spouses that share a stake in a company can potentially still work alongside each other once the divorce is final.
Spouses could also decide to sell the business and share the remaining profits. Another popular option is for one spouse may “buy out” the other. It's to your advantage to remain civil and friendly during divorce.
Contact Furman & Zavatsky for Help with a Business Owner Divorce
During divorce proceedings, business ownership does not have to be a hotly debated issue. The decision on how it's handled is between you and your spouse. Yes, owning and selling a business can complicate California divorce proceedings, but the primary goal is for both spouses to receive a fair share.
If both spouses are honest and remain friendly during this crucial part of the divorce, then there is a better chance for an outcome favorable outcome.
Suppose you are a business owner getting a divorce and want to sell your company. In that case, you should first consult with an experienced family law lawyer before filing the initial divorce petition.
Furman & Zavatsky and divorce and family law lawyers based in Los Angeles County and serve people across Southern California. We offer a free case consultation by phone at (818) 528-3471 or by filling out the contact form.