California is considered a community property state, and a privately owned business is part of that property’s assets. If your spouse owns his/her own business – it may be considered part of the community property, or not, depending on the situation.
If you’re pursuing a divorce and your spouse owns a business, we highly recommend you consult with an experienced family law attorney, rather than relying on blogs or online sources for your answers. Every business is unique, and complex factors affect what – if any – share of the business you have an interest in, as well as whether or not your share of the business is worth fighting for.
Here are some general considerations for anyone facing a divorce where a spouse’s business is in the picture:
When did your spouse establish the business?
If the business was owned by your spouse prior to your marriage, you may not be entitled to an entire 50% interest. It may be that the court determines the entire business – or a larger portion of it – belongs to your spouse.
What funds were used to establish the business?
If the funds came from the two of you, that’s one thing – community property. However, if the initial funds came from elsewhere, or was money your spouse already had in savings before you were married (not considered community assets), then you may be entitled to less than you think when all of the financial analysis is complete.
Is there are prenuptial or postnuptial agreement in place?
If you and your spouse drafted a prenuptial agreement to protect his/her business in the case of a divorce, you may not be entitled to any of it. However, these agreements are often contested during a divorce, especially if:
- You weren’t represented by your own lawyer
- You’ve determined your spouse hid assets or business interests from you when the agreement was drafted
- The agreement was drafted the week or night before you were married, rather than in a more methodical, timely fashion
- Your lawyer finds clear loopholes that slipped by the original lawyers
So, while the prenuptial agreement (prenup) may prevent the business – or a particular share of it – from ever becoming yours, it may also be that the loopholes or shortcomings of the prenup work in your favor.
Did the business’s equity or profitability grow during your marriage?
Even if your spouse protected his/her share in the business before you were married, any increase in the business’s overall value over the course of your marriage is considered community property. Therefore, you are entitled to 50% of that appreciation.
Did your spouse take a salary, or did s/he roll profit back into the business?
If you didn’t benefit financially from the business via your spouse’s competitive salary, because s/he rolled any extra funds back into the business, you may be entitled to more than half of the business since 50% of re-invested funds were actually yours.
How involved were you in the business?
The more involved you were in the business – helping to set it up, participating in decision making, working there, etc., the more shares of the business you may be entitled to.
What is the business’s professionally assessed value?
While the questions listed above can paint a better picture as to whether you’re entitled to your spouse’s business in a divorce, there are additional considerations as well. One of these is the business’s value – and that is assessed professionally. Forensic accountants perform this type of work – assessing the business’s debt to asset ratio.
If your spouse’s business still has considerable debt, that decreases it’s overall “value,” and you may determine you are just fine with allowing him/her to keep the business.
Is your spouse willing to relinquish his/her share of other assets?
If it’s the financial portion of the business’s value that matters most to you, and you aren’t interested in the business itself – there are other ways to divvy up the assets. Sometimes, a business owner is willing to give up his/her share of other shared assets (the house, car(s), retirement account(s), other property, etc.), in which case you can forgo your share of the business and recoup the value by retaining a greater share of other joint assets.
If you’re on the same page about most of the divorce decisions, but things are getting sticky around the business, we recommend meeting with a mediator to see if you can come to a mutual decision without having to go to the more costly, time- and energy-consuming court process.
There Are 3 Ways Private Businesses Are Handled During Divorce
If the court determines that you are entitled to any portion of your spouse’s business, there are three ways to handle it:
1. You become business partners
Often the least desirable outcome, we have also seen cases where ex-spouses become business partners, and the business remains as is with both spouses at the helm. Obviously, this is not the best solution for most couples, particularly if you weren’t emotionally or professionally involved in the business and have your own work and/or source of income.
2. Your partner sells the business
Depending on the situation, you may determine that selling the business is the best solution – particularly if one or the other of you is unable to buy the business from the other spouse, or your spouse is unwilling to grant more of your other shared assets to you, selling the business and splitting the proceeds might be the best way. Keep in mind that this can significantly slow down divorce proceedings if the business doesn’t sell as soon as you’d like.
3. One of you buys the other one out
Once the business’s value is determined, one of you buys the other one out at 50% of the value. This can be a no-brainer solution if you aren’t interested in the business, and your spouse has the means to buy it via cash or a third-party loan.
Again, your best bet is to hire a lawyer to review your options before making any final decisions about whether you are or are not interested in a share of your spouse’s business.
We’re Here To Help You
My name is Gerald Falzone and I am an experienced Bay Area family law specialist. My goal is to help my clients navigate their divorce proceedings without unnecessary angst, animosity, or drama. Contact my office to schedule a consultation. (510) 521-9500.