How Do I Protect A Business During Divorce?
The smartest thing you can do as a business owner is to plan ahead to protect your business from a divorce. A divorce can become more complex for a business owner. The impact of a divorce on your company could mean you are no longer able to run it.
How California Community Property Laws Affect Businesses
California separates property during a divorce based on community property law. All assets or debts gained during the length of a marriage are considered community property and must be split equally between spouses. Separate property, or assets and debts gained prior to the marriage, remain separate property.
A business that is started during the marriage is considered community property, meaning your spouse is legally obligated to half its value. In some divorces, this can make discussions contentious, as a spouse who owns a business may feel they should be entitled to all of it, while their spouse may feel that they contributed to the company. This isn’t always the case. Some marriages can work out an agreement and alter the community property requirements with a marital agreement.
Businesses Founded Prior to Marriage
Though most property gained prior to marriage is considered separate, this may not always be the case for businesses. As it is an asset that can change throughout your marriage, it’s subject to exceptions:
- The value of the company has grown during your marriage, and
- The value increase is related to your handling of the company prior to marriage or during your marriage.
It will likely be considered separate property if most of its value came from before your marriage. However, part or all of your business’s value may belong to your spouse if it grew significantly during your marriage.
Business assets and value can be divided through an agreement between you and your spouse, or the court will decide for you. Negotiating with your spouse will give you more control over the process. However, things between you may be too contentious, and if you can’t reach an agreement regarding the business, you need to be sure your argument is well-represented to the court.
How You Can Protect Your Business
Business owners should look out for their business interests before and during the marriage. The process will go much smoother if steps are taken to protect the business prior to divorce. When business owners are unable to come to an agreement with their spouse or fail to take protective steps, they may be faced with dissolving the business after the divorce.
- Marital Agreements
Pre- and postnuptial agreements are both ways that couples can determine the division of assets in a marriage. Prenuptial agreements are entered into before a couple is married, and post-nuptials are made after marriage. If you and your spouse enter into a marital agreement, you can list the business value as separate property rather than community unless modified by you.
This will separate the business from the community property separation in case of divorce, separation, or death and prevent arguments with your spouse. Make sure your marital agreements are legally enforceable and valid, or your business will remain unprotected.
- Business Valuation
This protects the percentage of the company value that you are entitled to. The value of your business is essential when determining how much value you and your spouse both receive. Business valuation done by a professional is important to ensure you both get fair value.
- Buy Out Your Spouse
If your spouse is owed half the business’s value, you can negotiate with them by buying them out. Both parties must agree to this option. You’ll end up paying your spouse more than half of the business’s value. This is because companies continue to generate wealth, and you must pay your spouse the amount they would have earned had they continued owning half of the value.
You can co-own the business if you and your spouse are confident in your ability to have a healthy working relationship after the divorce. This co-ownership is purely in document form and may mean that a spouse with little involvement in the company will simply earn income.
- Competitive Income
If you pay yourself a competitive salary, you don’t hold all your assets and profit in your company. This means your spouse can’t claim as much of your business’s value.
Q: How Do I Split My Business in Divorce in California?
A: If you and your spouse both have ownership in the company and you founded it together, you both have a say in how the community property is divided. It might also be considered community property if your business gained much of its value during your marriage. Community property must be split equally, or you and your spouse must reach an agreement. If you entered into your marriage with an already valuable business, it may count as separate property and not be subject to property division.
Q: Can Your Spouse Take Half of Your Business in a Divorce?
A: Yes, if your business is considered community property, your spouse is entitled to half the business value. You and your spouse can work out other methods of splitting this value, such as co-ownership, buying out your spouse, or agreeing to label the company as separate property with a postnuptial agreement.
Q: How Do I Protect My Business Before Divorce?
A: The most reliable way to protect your business is by drafting a marital agreement. A prenuptial or postnuptial agreement can list your business as separate property, including any value it gains during your marriage. If you and your spouse divorce, the business can’t be separated under California’s community property laws.
Q: How Is a Business Valued for Divorce in California?
A: Business valuation is complex. California courts often look at the value of a company’s tangible assets, intangible assets, goodwill, debts and liabilities, and several other factors. Together they are meant to show the company’s fair market value. However, even the amount of fair market value is changeable. Business valuation is better left to a third-party professional.
Bickford Blado & Botros: Your High-Asset Divorce Attorneys
At Bickford Blado & Botros, we have years of experience with complex and high-asset divorces, including those involving business valuation and the division of property. We want to support you during this difficult time and represent your business interests. Contact our professional team today to see how we can help you.
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