When a couple decides to divorce in California, then property and assets are subject to equitable distribution, meaning all marital assets, called “community property,” are split fairly between them, a 50/50 situation.
Many divorces, especially high-assets or high-net-worth, include a thriving business they started together or one spouse who owned the company before getting married, which continued to grow after getting married.
Many people have asked us how they can protect their business since they have spent a lifetime growing it and have made a significant financial investment?
Divorce is a crucial financial moment for anyone who owns a business, especially a large-scale company with high assets and profits.
Divorce for business owners is typically more difficult because of the complex issues of business valuation and spousal support, called alimony, that can threaten the company's continued existence.
As noted, California is a community property state meaning both spouses are considered equal owners of marital property, including a business, including any of the following:
- Professional practices,
- S Corporations,
- Sole proprietorships,
- Limited liability company (LLC),
- Business real estate,
- Small family business.
In California, a spouse could be entitled to 50 percent of the business when the court equally divides the marital property. Still, spouses could agree to divide the property in any way they want, even if it's not equal. The impact of a divorce on business owners can be reduced by planning.
There are several steps a company owner can take to keep their business safe both before and after getting married. Our California family law lawyers will examine this topic in more detail below.
Why is Planning Ahead Crucial to Protecting Your Company?
The most effective way to “divorce-proof” your business occurs before marriage. There is no substitute for planning to ensure the security of your company.
Large business owners with high assets will usually benefit the most from having a prenuptial agreement, which should fall under wise business strategies. It's often a touchy emotional subject with your soon-to-be spouse.
A prenuptial agreement can designate your business as separate property and any appreciation or increased value of the company. If you didn't obtain a prenup before marriage, you should consider getting a signed postnuptial agreement soon after marriage.
In any business structure, such as a corporation, LLC, or partnership, you can craft up an agreement for a buy-out, daily operating cooperation, or a shareholder agreement that specifies what will happen to the company if the owner gets divorced. Still, these steps won't impact the interest owned by the divorcing spouse.
All high-asset business owners need to know that even when their spouse is not involved in running the company, they are still legally entitled to a portion of the business value in a divorce.
California family law courts consider marriage a financial partner even if the wife is a stay-at-home mom who primarily raises the kids while supporting the husband, who owns and runs the company's daily operation.
In this common scenario, the court considers the wife entitled to share in the business's success. It would be wise for business owners to keep their finances separate from marital issues.
How Does a Prenuptial Agreement Protect a Company Owner?
Before getting married, all high-asset business owners, such as physicians, should consider protecting their company with a California prenuptial agreement if the marriage fails.
While it's certainly true this may not go over well with your future spouse, it has become a fairly standard agreement that outlines their present and future property rights. A prenuptial agreement can:
- reduce any conflicts later if the couple decides to get a divorce,
- protect separate property owned by each spouse before marriage, such as a long-held family-owned business,
- changing the impact of community property laws by determining how property acquired during the marriage will be classified.
Further, a prenup can help preserve the marriage because each spouse will know how the company value will be divided in case of a divorce. A prenup typically lists what each spouse brings into their marriage, including the following:
- all their assets,
- what each spouse owes, called liabilities,
- what happens to the assets and liabilities in case of separation or divorce,
- property and debts acquired during the marriage and what will happen to them.
What Are the Requirements of a Prenuptial Agreement?
A California prenuptial agreement is essentially a contract that will be used and upheld by the family law court in case of a divorce, but these types of arrangements have some requirements, such as:
- it must be in writing and signed by both of the spouses,
- spouses must have the capacity to give consent and not made while one spouse is intoxicated, for example, or signed under duress,
- it must be lawful and appear fair. A court could deny a prenup if it is severely slanted to favor one spouse,
A well-written prenuptial agreement is typically the best way to protect a company that was already operating before the marriage or that grew during their marriage. You need to understand some provisions cannot be included in a postnuptial agreement.
What About a Postnuptial Agreement?
If you are already married and own a business, then a postnuptial agreement can be drafted and signed to protect the company in a divorce. A postnuptial agreement is very similar to a prenuptial, but it will list marital rights between spouses after the marriage.
These arrangements are not as popular, and family courts closely scrutinize them. Even so, these agreements are used to change the nature of property from community to separate property or vice versa, called "transmutation.".
Further, company owners should pay themselves competitive salaries instead of just investing all their earnings into the business. Why? If you invest all the company profits back into the business, it will typically result in your spouse receiving a more significant claim on the company's value.
The postnuptial could also include how you want your spouse to be involved in the business and whether or not you can still work together to run the company after a divorce.
Suppose your spouse has an ownership interest in the company, and you don't want to continue as business partners after the divorce? In that case, some options exist, such as using marital assets to buy out your spouse's share of the company.
Another option is to negotiate a long-term payment plan, or if an agreement can't be reached, you can sell the business and divide the profit equally.
Contact Furman & Zavatsky to Protect Your Company in a Divorce
If you got married without any way to protect your business, you still have some legal options. Your spouse might attempt to inflate their contributions to a business or acquire an appraisal that overvalues the company to obtain a larger buyout.
In other words, you will need a skilled and experienced legal representation familiar with the maneuvers and knows how to avoid excessive buyouts to a spouse when a company owner is going through the divorce process.
If you have questions or concerns about prenuptial or postnuptial agreements for your business in a divorce, then our family law lawyers can help you. In many cases, you might be able to leave the marriage with your company still intact and your financial situation under control.
The law firm of Furman and Zavatsky are Los Angeles divorce and family law attorneys who represent people across the state of California. We provide a free case evaluation by phone or use the contact form.