When you own your own business, you know that it plays a key role in your livelihood. You may have invested years of time and perhaps even several of your own paychecks into its growth. It’s no surprise that a divorce could make you feel like your whole world is at stake.
While every business and divorce is different, here are some things that will be considered in how a business will be divided during a divorce:
If you owned the business before your marriage, it’s more likely to be viewed as individual rather than martial property. However, if your spouse contributed to the business during the marriage then it may be determined that they deserve a share of the ownership.
This could be as obvious as being on the payroll, owning shares, or investing, but it could also be something subtler. For example, if you took from shared bank accounts to cover business costs or reinvested all of your profits back into the business, your ex-spouse may successfully argue that they deserve a cut of the appreciated value of the business since martial assets were contributed.
Since California is a community property state, your ex-spouse may have a right to the appreciation of value of the business if you did not keep your business expenses separate from martial funds. The best way to ensure that your business remains yours during a divorce is to have a comprehensive prenup/premarital agreement where your spouse waives any claim to the business now and in the future—even if it appreciates in value.
Type of Business
If you established your business as an LLC, trust, or corporation, it is much more protected in a divorce because it exists as a separate legal entity. Running a business as a sole proprietorship may make things more complicated because it’s likely enmeshed with your personal and martial assets.
Documentation and Separation
If you do not have a prenup and did not establish your business as a separate entity, do as much as you can leading up to your divorce to keep your business expenses separate from joint funds. Obtain and keep careful documentation of where your business funds come and where they went.
Be sure to also document your spouses’ lack of involvement in your business, to defend your claim that your business is truly your separate property.
Frequently your spouse’s lawyer will want the court to calculate all of the business income as your income. If your spouse is claiming that the business is community property, you might be put in a situation where support out of income that is community property, and then later will have to pay it again as distribution of the profits of your business. This is “double dipping” because your income comes from the same source.
What your business means to you personally may differ from its market value as an asset. It’s important to have your business valued by a professional third party to determine how much it’s really worth financially. You may have the opportunity to trade other assets to your spouse in exchange for your business.
Although California is a community property state, this doesn’t mean that every asset needs to be divided equally. So long as each spouse comes out of the process with assets that are determined equal in value, the division is considered acceptable. Your ex-spouse may have absolutely no interest in running or taking shares of a business and may prefer to instead take a vacation home, car, or bank account.
Your best chance to retain your business intact is to be amicable with your ex-spouse and provide options to match their share of the value. Just like any other asset, a business has economic value that should be divided in a way that’s perceived to be equal by both parties.
If you need help navigating through the complexities of divorce and property division, contact our seasoned family law attorneys at Norman Dowler LLP. We specialize in family law in Ventura, Santa Barbara, and Los Angeles Counties.
Thomas J. Hutchinson
Norman Dowler, LLP
840 County Square Drive, Third Floor
Ventura, CA 93003