For most couples who have decided to get a divorce, their primary concerns are usually child custody and property division. However, when a spouse owns and operates a professional practice, their assets could be subjected to equitable division with their spouse in a California divorce.
Your professional practice is the primary source of revenue that you spent a lifetime building. It took many years of personal sacrifice and the enormous cost of education to acquire a professional license as a doctor, dentist, attorney, therapist, chiropractor, optometrist, veterinary medicine, engineer, accountant, and others.
Now that you have decided to end your marriage, is it possible that your spouse will receive some of the value from your professional practice or with a partial ownership interest after the divorce?
California is a community property state, meaning the family court will generally expect that you and your spouse will equally divide the assets and debts from your marriage in case of divorce.
Perhaps you were the only one working at your professional practice? If you used income or assets earned during marriage to create or maintain your practice, your soon-to-be ex-spouse could have a partial legal interest in your professional practice.
A prenuptial or postnuptial agreement could designate your professional practice as separate property in case of divorce. If you fail to take steps to protect your practice, then it means that at least some of the business value could be subjected to division with your spouse.
The prenuptial agreement can't prevent one spouse from seeking child custody, visitation, or child support. However, it's essential to know that this does not automatically mean that your ex-spouse will receive part of the business during the divorce proceedings. Our California divorce and family law lawyers will look at this below.
What is Dissipation of Marital Assets?
Frequently, when someone is initially setting up a professional practice, they will consult with a lawyer for advice on how to set up the practice to minimize liability.
Again, as noted above, some decide to seek prenuptial agreements, while others will use post-nuptial agreements if they were already married when the professional practice was created. In reality, however, most professional practice owners don't consider the impact of a divorce on their business.
Thus, when they find themselves in a divorce situation, they often make bad decisions that can haunt them later. For example, perhaps they try to hide their business assets and make transactions that are not a regular part of their business? In that case, they could face the accusation of dissipation of marital assets, which is described as:
- “One spouse uses money or assets for purposes unrelated to the marriage when it is irretrievably or irreconcilably broken.”
In other words, it's intentionally taking marital assets to the detriment of the other spouse to benefit them.
If discovered, the California family courts can come down hard on any spouse who attempts to manipulate assets during divorce proceedings. Thus, any spouse who owns a professional practice needs to continue operating their business in the same relative manner before the divorce process begins.
What is Discovery?
Discovery is a process that lawyers complete during a divorce to find information about marital assets, such as a professional practice. If a spouse created the practice before getting married, it could still be partially considered part of community property.
Perhaps the value of professional practice increased during the marriage? In that case, the increase would be part of the marital estate.
Thus, both divorce lawyers could review the business records as part of discovery to determine the value of the professional practice/business at the date of the marriage and the date of the separation.
In this manner, they could estimate the amount of the practice belonging to the marital estate. All financial records can be examined during the discovery process of a California divorce.
How Can You Determine the Value of a Professional Practice?
If necessary, professional practice can be valued in the divorce process by different valuation methods. Perhaps both spouses decide that it would be in everyone's best interest to keep operating the business together even though the marriage will end. Still, most will agree that one spouse will move away from the practice altogether.
Thus, the first step is determining whether the professional practice will fall under the umbrella of community property. Simply put, as noted above, if the professional practice was started, or grew significantly during the marriage, then it will fall under a marital property settlement to be divided equally, 50/50.
The primary owner and operator spouse will typically seek to avoid an inflated evaluation that would increase their liability in a divorce settlement agreement.
Your family law lawyer will usually use proper and independent methods to obtain a proper professional practice valuation to reach an equitable division.
It's often challenging to obtain the value of professional practice because much of its worth is held up in goodwill, which is an intangible concept. In other words, how can you place a value on the reputation of a professional practice?
Thus, valuation experts or accountants can be hired to investigate documentation to obtain a fair value. Some of the factors they will use to determine valuation related to the professional practice include the following:
- Bank statements,
- Accounts receivable,
- Business assets and debts,
- Tax filings,
- Inventory of the professional practice,
- Value of the business equipment,
- Location of the property,
- Goodwill of the business,
- Potential professional practice growth,
- Potential business challenges,
- Market stability.
Once the overall value has been established, spouses must agree on how much professional practice belongs to each of them and how much falls under marital property.
Now you see how this can get complicated and hotly debated, especially in divorces where trust has been broken down. It's important to remember that if a professional practice was formed before the marriage, it could fall mainly under the separate property laws in California.
How Can a Compromise Be Reached?
It's important to remember several other factors that make the business valuation process complex, such as:
- professional practices usually grow over time,
- professional practices often include a partner,
- the partnership could dissolve after some time,
- professional practice often reorganizes several times.
To make the issue even more complex, dividing the assets of professional practice when a marriage ends sometimes means the community property might be entitled to some reimbursement for training and education expenses acquired during the marriage.
Mediators can often work together to reach a marriage settlement agreement acceptable to both spouses and protect your best interests. However, it would help if you remembered that divorce, by its very nature, is a series of compromises.
This means you must be reasonable and willing to work together to resolve divorce matters. Otherwise, litigation in court will be required, and that often leads to unexpected decisions that might not be favorable. There are numerous ways to reach a compromise with your spouse after the valuation of the professional practice has been concluded, such as the following:
- spouses exchange assets and debts of equal value,
- both spouses remain partners in the business,
- sell the practice and divide the assets equally,
- the primary practice owner buys out the other spouse;
The list above is the most common options, but others depend on the circumstances and the type of business. It would help if you worked with an attorney with experience in resolving the complex division of property issues and high net worth divorces to protect your professional practice.
Contact our legal team to review the options if you need help protecting your professional practice. We can collaborate with a team of experts to evaluate your professional practice to reach an equitable division of property agreement that is in your best interest.
Furman & Zavatsky are California divorce and family law lawyers in Los Angeles County, California. We provide a free case consultation via phone or the contact form.
