Divorce is difficult enough when dealing with the emotional side of it, and if you are a business owner, figuring out how your business will be treated in your divorce can add an extra layer of complication. It can be upsetting to think about losing a business that you have built over the years, and there are precautions you can take in order to protect what you have worked so hard for.
One of the first things to consider is whether the community has a claim to the business and if so, the value of that claim. That would depend on whether the business was owned prior to the marriage, the source of funds used to acquire the business, and the extent of financial contributions and personal efforts contributed to the business by either spouse during the marriage. In order to understand how your business will be divided during your divorce, it’s important to note that California is a community property state.
In general, California law states that during a divorce, you will receive one half of the community’s interest in your spouse’s business. If the business was started during the marriage, the entire value of the business belongs to the community. If, however, your spouse brought the business into the marriage, then the value of the business at time of marriage is considered separate property and the increased value during marriage is considered community property. If you or your spouse owns a business, it’s important to work with your attorney early in your case in order to develop a strategy for valuing the business. Different valuation methods apply depending on what type of business it is.
If you and your spouse own a family business together, then deciding what should happen with that family business upon divorce can be challenging. The value of the business will likely decrease substantially if you remain co-owners unless you continue to jointly own and operate the business free of conflict. As you are looking into your options, consider the following:
- If one spouse retains ownership of the business, are there enough other assets for the other spouse to receive a fair share of the total marital assets?
- What would you do if you weren’t working in the business?
- What is the value of the business?
- What is the market for the business if it were to be sold?
You and your soon to be ex-spouse know your business the best. With the help of your divorce attorney, you may be able to create a settlement that can satisfy you both. If not, the judge will make the decision for you at trial.
While determining final control over your business is one aspect of a business during divorce settlement proceedings, it’s also important to establish the value of the business. Assessing the value of a business can be a complex process and is often a major source of disagreement between spouses during a divorce. In most cases where a business has significant value, it will be necessary for one or more qualified valuation professional such as an Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), or Certified Public Accountant (CPA) to be engaged as part of the marital dissolution process to help determine the appropriate fair market value of your business.
Another way to protect your business is by having a prenuptial or postnuptial agreement. A prenuptial agreement protects each spouses’ financial assets and property in the event of a divorce. Prenuptial agreements assure that the division of property is predetermined in order to avoid ligation between spouses. In it, you will designate any future businesses or businesses which have already started as separate property. A postnuptial agreement is similar to a prenuptial agreement; however, this agreement is executed after the marriage. A post-marital agreement serves as a viable alternative for spouses who married without a prenuptial agreement. It offers married couples an opportunity to protect each individual’s assets and financial health in the event of a legal separation or divorce. You can set forth how separate and community property that has been acquired before and during the marriage will be divided. However, while the prenuptial agreement is assumed to be valid under California law, a postnuptial agreement is assumed invalid unless there is careful adherence to all requirements as to representation, disclosure, and fairness.
If you find yourself in this situation, you will need an experienced divorce attorney to help you protect yourself and your long-term business interests. Our team of attorneys at Schoenberg Family Law Group can help guide you through each step of the divorce process and help you determine what property and assets you are entitled to under California’s divorce laws.
by Debra Schoenberg