In California, any business created during the marriage will be considered community property. This means that when assets are divided during the divorce process, the other spouse is legally entitled to half of the value of the business. How spouses treat the business could impact their support obligations and their tax situations.
When you own a business and know divorce is inevitable, you need to consult with a California family law attorney. It's essential to determine the best way to handle your marriage dissolution and business ownership early. Many people decide to create their businesses, including a sole proprietor, with some partners or even shareholders.
Owning a business is often preferred over working for a company, but one disadvantage to business ownership occurs in a situation where the owner gets a divorce.
In other words, the divorce can become complex when determining how to deal with small business assets in a divorce. Often, it's challenging, emotional, and a hotly debated topic that creates anger and bitterness between spouses.
In some divorces where the assets of a business need to be addressed, the discussion quickly becomes heated. The spouse who primarily operated the business frequently becomes defensive and feels they sacrificed too much to give their spouse half the value.
The other spouse often feels that they have made a substantial contribution to the business and have earned a portion of the business value. However, most companies need more than half their value to survive and keep their doors open. In this article by our California divorce lawyers, we will examine this critical topic if greater detail below.
How Do Community Property Laws Apply to My Business?
Let's say you are a business owner in California, and you are getting a divorce. You owned and operated the business yourself without your spouse's assistance during the marriage. In this case, you need to understand that in community property states like California, the law distinguishes between “separate property” and “community property:”
- separate property is the property you had before getting married;
- community property is the property you acquire with your earnings or labor during the marriage.
Thus, in a California divorce, the separate property will go to the spouse who owns it, and the community property is divided equally, 50/50, between the spouses. Readers should note these requirements can be altered through a premarital agreement or postmarital agreement.
In other words, if you created and built a business and at the same time you were married, your property interest in the business would be considered community property and split equally in case of a divorce. If you started your business before getting married, then there are a few issues that need to be addressed, such as:
- how much has the business value grown during the marriage?
- Is any increase in business value due to your efforts before the marriage or the result of your efforts during the marriage?
If the value of the business increased because of your efforts before getting married to your spouse, then the increase could be considered separate property.
California's community property laws don't automatically make your spouse the owner and operator of your business. But instead that your spouse is a half-owner of the business value.
In many business owner divorces, it's not always clear-cut and straightforward that the business was all separate property or all community property. There are frequent disputes among spouses and experts hired to determine the company's value.
How Is the Value of My Business Determined?
Determining the value of a business in a divorce, especially if there is substantial value in intellectual property, can become a complex area of California's divorce laws.
It's no surprise that the spouse who owns the business will underestimate the value when determining the community property while the other spouse overvalues it.
Disagreements are common and will often require retaining a neutral accountant to examine and decide the value of a business. The accountant will typically conduct a comprehensive assessment of the company's value and look at important factors such as current revenue, assets, debts, future profitability, and inventory, among other factors.
This process of hiring an accountant usually is expensive and complicated, depending on the size of the business. However, it is often necessary, and spouses, through divorce mediation, can reach an agreement for the accountant to give a general assessment of the business value rather than providing a comprehensive detailed review.
How Are Business Assets Divided in Divorce?
In a California divorce, business assets can generally be divided in two different ways:
- The first is for spouses to reach a mutual agreement; or
- The second way is to force the family court to decide.
Reaching an agreement with your spouse is almost always the best option but not always realistic. Forcing a family court judge to decide might not turn out as expected. In ugly divorces, spouses can't agree on just about anything, especially on who will get all or part of business assets during divorce proceedings.
Navigating the complex issue of divorce and business ownership often requires the legal guidance of an experienced California divorce and family law attorney. Some problems that can impact the division of assets must be examined, such as how long the business has been owned and whether both spouses were active in running that business.
Can You “Buyout” Your Spouse?
Yes. In a situation where your spouse is supposed to receive half of the business value, you have the option of buying them out as long as you can reach a mutual agreement with them. However, the amount you will be required to pay in such an agreement will usually amount to more than half the business valuation.
Why? Because the business will continue to generate new revenue after the divorce is final, and the spouse you are buying out will not be eligible to benefit from the new assets as they will no longer be part of the business.
This means the buyout amount will need to equal the business's current value along with what the spouse could have expected to earn in the future. As you can see, the precise buyout amount is often a complicated issue and the reason why mutual agreements are not always possible.
How Are the Family Courts Involved in Dividing Business Ownership?
Even when you can reach an agreement, the family court judge makes the final decision. They have to approve any formal agreement you may have reached with your spouse. The information presented to the judge is crucial, and they need to have an accurate description of how the business is operated.
In some cases, a business can be solely granted to one spouse, but there is more likely equal division between both spouses. The primary factors in dividing business ownership in divorce are the length of the marriage and how active both spouses were in operating the daily business.
Get Guidance from a California Divorce Professional
If you are a business owner getting a divorce, it is essential to consult with an experienced divorce lawyer before filing your paperwork. As discussed, if you are concerned about your ex-spouse controlling your business, only qualified legal representation can help you navigate the often complex process.
Not all property owned by one spouse is considered community property. For example, assets inherited by one spouse or earned before marriage are separate. If you owned a thriving profitable business before getting married, the company would remain your own in divorce proceedings.
If the business was inherited from your parents, your ex-spouse is not entitled to half of the business assets. However, if you added your spouse to the business incorporation documentation, they will be entitled to some assets.
If the business grew from your spouse's involvement, that would be a factor taken into consideration. Furman & Zavatsky and divorce and family law lawyers based in Los Angeles County. We offer a free case evaluation by phone or filling out the contact form.