Getting a traditional divorce in California is often challenging but becomes more complex when any business is involved. In other words, divorcing a spouse who is also a business partner can reach the next level of difficulty.
Owning a business together has many unique challenges when getting divorced, including managing the company during the divorce, income distribution from the business, and dividing the business when the divorce is finalized.
Most spouses who own a business together have different responsibilities, and managing it typically includes dividing them up.
For example, dealing with sales differs from maintaining the books and accounting.
Most spouses who own and operate a business will divide these tasks separately to make them more manageable.
One typically handles all the business marketing while the other takes the administrative issues. Business operations will depend on the type of business:
- Do you sell a product or service?
- Is it a professional practice?
- Is it a family business that one spouse owned before marriage?
- Who is primarily in control of running the business?
- Is there a prenuptial or postnuptial agreement in place?
All these questions are essential in the context of a divorce.
Suppose one spouse primarily ran the business and dealt with all the issues of the employees, products, sales, service, customer relations, etc. In that case, it might not significantly matter what your spouse does in a divorce.
The level of control by one spouse often dictates what will happen to a business during the dissolution of marriage proceedings and whether a family law court will need to get involved.
That control may dictate the direction of the business they own together during the divorce, absent court involvement. The divorcing couple may remain civil and work together in business operations. Let's review this topic in more detail below.
How Can You Equitably Divide Business Interest?
When business owners get a divorce, the future of the company and their finances often are at stake, but there are some ways to preserve the business interest and divide the interest equally.
One such step is to separate your personal and professional life, which is easier said than done when emotions are involved. Often there is bitterness between spouses, and one might no longer care what happens to the company, but you have to look at the big picture.
Doing anything to harm and damage the business is never in the best interest of your children. Never intentionally damage your spouse's reputation at work or argue in front of the employees.
Instead, despite the ongoing divorce proceedings, you should focus on making the business as profitable as possible, which will be in your best interest.
There are ways to equitably divide business interests during a California divorce, which is part of the property division process.
A Los Angeles family law attorney can assist you in making important decisions during the proceeding, such as:
- Whether one or spouses will continue to run the business;
- Whether one spouse will buy out the business interest;
- Whether you should sell it and divide the proceeds equally.
Regardless of the decision, protecting the business and its value during this time is essential, and both spouses may need legal representation. In some high-conflict divorces, couples constantly fight and can't reach a settlement agreement.
What About Business Operations and Income?
Many businesses have agreements on how it's operated, such as a Limited Liability Company (LLC) or a sole proprietorship. A corporation will typically have by-laws or shareholder agreements. Partnerships also have operational contracts that lay out which person performs specific functions.
If there are no written operational documents, they are run by management. A close review of client and vendor records will be necessary to determine who controls the business.
Divorce can be more complex if you own and operate a professional service business that requires a state or federal license.
When deciding how spouses will divide the income from a business they own together, there are some important considerations, such as:
- Which spouse managed the business accounts during the marriage?
- Who was responsible for distributing the business income?
- Which spouse will manage the business after the divorce is final?
Income distribution is crucial because it's directly related to spouses' economic stability during their divorce.
There are situations in a bitter or contested divorce where spouses who own businesses together intentionally attempt to create financial hardship for the other spouse through the mismanagement of the business revenue.
For example, suppose the controlling spouse stops paying the other spouse's income. Suppose they make credible threats to do so.
Suppose they give themselves a raise without seeking approval from their business partner, who happens to be their spouse. Suppose they lie about business expenses or create a false paper trail claiming the business is failing.
What About Family Court Intervention?
It's crucial that spouses openly communicate about business income, expenses, profit and loss during divorce proceedings, but this is not always what happens.
A typical scenario in a business partnership with spouses is when one spouse has primary and complete control of managing the financial issues. They pay all the bills and the employee payroll.
The other spouse will handle the daily business operations, including managing the employees, etc. In an ugly, contested divorce, the spouse who handles the financial issues often stops communication with the other spouse, and the legal battle begins.
In that case, California family court intervention may be the only option when spouses cannot reach a mutual agreement on dividing business assets.
The court might issue specific orders, such as business accounting and income distribution issues. They could also appoint a receiver to receive and distribute the business revenue.
Typically, when a divorce has been finalized in California, spouses who own a business together will make one of the following agreements on dividing it:
- One spouse will buy out the other spouse's business interest;
- Spouses agree to sell the business and divide the proceeds;
- Spouses agree to continue operating the business together.
You might need legal advice from a tax professional before dividing the business.
If you and your spouse own a business together and are considering dissolving your marriage, contact our Los Angeles divorce lawyers for a free case evaluation.
Marriage dissolution involving business partners has unique challenges, and you will need experienced legal representation. The family law lawyers at Furman & Zavatsky provide legal representation across California.