Divorces tend to be complex when it comes to dividing assets. After working hard and building up your business, it is understandable to be concerned about the fate of your business after the divorce. You’ll likely want to hold on to certain assets and maintain ownership of your business, so understanding what California divorce and business looks like can help you make important decisions for a desired outcome.
The Difference Between Separate and Community Property
California is a community property state, meaning if your business has become commingled or purchased during your marriage, it can be subject to being divided in half during your divorce. Considering the impact they have on what is divided during the divorce, it’s vital to understand the classifications of both separate and community property.
Separate Property
Any assets or belongings owned by one spouse before marriage or gifts given to one spouse is considered separate property. Separate property is safe from division, as the courts do not have any jurisdiction to give one party’s separate property to the other party.
Community Property
Community property, or marital property, is when you:
- Started or acquired the business during your marriage
- Started or inherited the business before your marriage but made commingled property by contributing to the business using marital funds
- Started the business before your marriage, but your spouse became the business manager
Dividing a Business During a California Divorce
In California, business assets that are community property are treated the same as personal assets during a divorce. Even if you started or owned the business before you were married, or more involved than your spouse was day-to-day, a judge will split ownership 50/50 if the court views the business as community property.
This changes if you started the business before you got together and never commingled the business with your spouse. If you never put your spouse’s name on any business documents or named them as co-owners, it is viewed as separate property. This may be able to protect your business from being divided with your spouse, but you still may owe your ex the increase in value of your business that happened while you were married.
Valuation of the Business
You’ll need to value your business if it has been considered marital property. Getting an accurate valuation is important to ensure a fair division of all assets. There are a few different factors that add value to your business:
- Any fixed assets, ie. furniture or equipment
- Debts or liabilities
- Current and future profitability
- Market value
- Intangible assets, ie. financial statements or accounts receivable
- Goodwill
Options for Handling a Family Business
There are a few options when handling a family business when going through a divorce.
Buyout
Spouses may negotiate a fair price and determine the term of payment if they decide to buy out the other spouse’s interest in the business. They may decide to pay in one lump sum or agree on installment payments.
Co-Ownership
Some spouses may be able to co-own and operate the business after a divorce. With this agreement, clear and consistent communication and cooperation are necessary. An explicit agreement on management responsibilities, decision-making, and profit sharing should be made.
Sell the Business
If it is impractical to keep the business, or both spouses decide they do not want to continue it, selling it and dividing the proceeds can be the best option. It’ll take a skilled family law attorney in order to navigate the sale of the business and to ensure a fair distribution of the sale.
How to Protect Your Business in a Divorce in California
- Create a Prenup or Postnuptial Agreement: If you have already created a prenup or postnuptial agreement, you can go over how the assets will be divided when going through the divorce. While a prenup may be challenged in some scenarios, you can protect your business from being divided if you choose this type of agreement.
- Use Alternative Dispute Resolutions: You can handle the division through an alternative dispute resolution like mediation. When you settle the matter outside of court, you’ll find you have more autonomy over what happens when negotiating with the other party.
- Find Quality Insurance: When you invest in quality insurance, you may take advantage of their programs that allow you to accumulate cash value over time. This allows you to liquidate the funds later in order to buy out your partner.
- Create a Trust: You are no longer considered an owner when your business is placed in a trust. The business is protected from being considered a marital asset because the trust technically owns the business.
- Avoid Commingling Assets: Make sure you avoid commingling your business. Keep funds separate, and limit your spouse’s contributions and involvement in the business.
Talk to a Divorce Attorney in Kern County, CA
It is difficult to go through a divorce as is but is especially stressful when you have a business or other important assets you’d like to protect. At Azemika & Azemika, we are here to help you protect those assets. Our practice has been devoted to family law for 28 years. We efficiently handle cases involving divorce, dissolutions of partnerships, child custody and visitations, abandonment, and adoptions. Serving all of Kern County, we want you to have the opportunity to make informed decisions from the best position possible for you and your family’s future. Contact us today.
