You worked hard to build your business, and perhaps you started that hard work years before you met your spouse. Now that you face divorce, you may worry about losing the company you created.
Dividing a business in a divorce can be tricky, especially when the business started before the marriage and underwent changes after the couple said, “I do.” California law offers important protections for separate or pre-marriage property, including business property. However, your spouse may have a claim to part of the business’s growth during your marriage.
At Barnholtz & Kugler, we understand how much your business means to you. With over 60 years of combined legal experience, our attorneys strive to provide the best advocacy for spouses facing divorce. We help clients protect their financial interests and navigate complicated property disputes.
How Is a Business Divided in a Divorce?
California follows community property laws. Under California’s Family Code, spouses typically keep their separate property and divide the community estate equally. Couples can circumvent these rules if they agree to different terms or a statutory exception applies.
What Are Community Property and Separate Property?
Before dividing a business in a divorce, the court must determine which portions qualify as community or separate property.
Community Property
Community property generally includes assets spouses acquire during the marriage and while domiciled in California. Examples include:
- A business established during the marriage using community funds,
- Ownership interests purchased with marital earnings,
- Business assets acquired using community property, and
- Income earned through a spouse’s work during the marriage.
When dividing business assets in a divorce, spouses generally share an equal interest in community property that comes from the venture. This happens even when only one spouse owns or manages the business.
Separate Property
Separate property typically includes:
- Assets owned before marriage,
- Inheritances,
- Gifts received individually,
- Assets acquired after you and your spouse separate, and
- Certain income or profits from separate property.
Depending on the circumstances, a business you started before your marriage can remain your separate property and 100% yours in the divorce. But if your efforts during the marriage helped the business grow, or if you use marital assets to expand the business, your spouse may have a claim to half of that growth.
Courts may need to distinguish appreciation attributable to your labor from appreciation attributable to the business’s existing capital or other factors. The timing and source of business growth can significantly affect the outcome.
What Happens in a Divorce When a Business Owner Commingles Property?
Commingling occurs when spouses mix separate and community property. For example, you might deposit business revenue and personal earnings into a marital savings account. Commingling does not automatically transform an entire separate business into community property, but it can make ownership interests harder to establish.
Courts may need to examine financial records to identify the sources of business investments and determine whether the community acquired an interest in the business or has a reimbursement claim. When getting a divorce, a business owner may need to prove their right to all business proceeds by submitting useful documents, such as:
- Bank statements,
- Tax returns,
- Business agreements,
- Accounting records,
- Business valuations, and
- Records of capital contributions.
A business owner may also need the help of a forensic accountant to identify the source of every penny from a commingled account or asset.
What Issues Can Business Owners Face When Dividing a Business in a Divorce?
Dividing business assets during a divorce often involves more than identifying the original owner. You may need to consider the following.
Determining the Business’s Value
Courts generally value assets and liabilities as close as practicable to the divorce trial date. However, courts may use an alternative valuation date when good cause exists.
Business valuation can involve examining:
- Revenue,
- Profits,
- Agreements,
- Liabilities,
- Equipment,
- Ownership interests, and
- Goodwill.
A professional valuation may help establish the business’s value and whether it increased during the marriage.
Identifying Each Spouse’s Contributions
A spouse might contribute several resources to a business, including:
- Money,
- Management services,
- Equipment,
- Unpaid labor, and
- Other efforts or property.
Even when one spouse holds the ownership documents, the court may need to evaluate whether community funds or labor contributed to the company’s value, thereby entitling the other spouse to a share of the business.
Protecting Business Operations
A divorce can create uncertainty about company finances, ownership, and future operations. And business owners may worry about:
- Selling assets,
- Paying a settlement, or
- Maintaining control.
Fortunately, dividing business assets in a divorce does not automatically require selling the company. Courts can consider various ways to distribute community property to achieve an equal or proper split.
How Can an Agreement Between Spouses Help?
Written agreements can help spouses customize and clarify their financial rights and reduce uncertainty. Couples can create new property rights in:
- Premarital agreements,
- Marital agreements, and
- Divorce agreements.
A carefully prepared agreement can help protect your interests and prevent misunderstandings. However, the agreement must be enforceable.
Under California law, an agreement’s enforceability typically depends on proof that:
- The agreement was entered into voluntarily,
- Both parties had access to all relevant financial information before signing (or properly waived disclosure),
- The agreement’s terms are fair, and
- Both parties had the opportunity and adequate time to obtain independent counsel’s advice regarding the agreement.
Having an attorney draft or review your business agreements and any agreements you enter into with your spouse can help ensure that your interests are properly protected.
How Can a California Divorce Attorney Help?
When you ask how a business is divided in a divorce, the answer depends on:
- When you acquired the company,
- How the business developed, and
- What business contributions occurred during your marriage.
An attorney can help you understand those factors before making decisions that affect your future.
Consulting an attorney can be critical to safeguarding your finances and hard work. An experienced family law attorney can help you:
- Identify separate and community property,
- Review financial and business records,
- Assess valuation issues, and
- Negotiate a fair settlement.
Your attorney can also work with financial professionals when necessary and advocate for your interests in court.
Protect Your Hard Work with Barnholtz & Kugler
Your business represents years of effort, investment, and personal sacrifice. A divorce should not leave you uncertain about your rights to what you built. When dividing business assets in a divorce, you should protect yourself with the help of a good attorney.
At Barnholtz & Kugler, our attorneys bring many decades of combined experience to family law matters. We provide exceptional representation through careful preparation, personal attention, and strong advocacy.
Whether you need help determining the value of a premarital business, protecting separate property, or negotiating a fair division of community assets, our team can guide you. Contact us by phone or online today to schedule an appointment.