Owning and operating a family business can be a full-time commitment for a married couple. Should the pair decide to divorce, dividing this type of asset and its obligations can be complicated, especially if both parties want to continue running the enterprise. Depending on how and when the business was formed, it may or may not be considered community property. Here is more on understanding California community property and business ownership.
Business Ownership and Community Property
When a California couple forms a business while married, the entity will be considered their jointly owned (community) property. Consequently, if the two divorced, each would be entitled to their half or community ownership interest.
Dividing a Community Property Business
A business that is a community-owned asset can be divided in a number of ways during divorce, such as:
Paying One Spouse—If one spouse wants to continue operating the enterprise, they could pay the other spouse the value of their community share. This may involve making a direct payment or balancing the division of other marital assets to compensate the spouse for their share.
Shared Ownership— When both want to continue operating the business, the spouses could arrange to share ownership of the entity. This may involve one spouse having stock or exclusive authority to manage or make operational decisions.
Selling the Business—The parties may determine that it’s best for them to sell the business. In that case, they can work with their divorce attorneys to determine the most equitable way to sell their enterprise and divide the proceeds.
Close the Business—If the business is not marketable, and one can’t afford to pay the other for their community share, the parties may determine that it is best to divide the remaining obligations and close the enterprise.
Business Ownership and Separate Property
In a California divorce, outside of certain exceptions, assets a spouse acquired before marriage are considered to be their separate property. When a property is determined to be separate, it belongs to the spouse who owned it coming into the marriage and is not subject to division. However, separate property can be transmuted into community property through a prenuptial or postnuptial agreement.
When one spouse owns and operates a separate property business during marriage, the enterprise will remain their asset during divorce. However, the court can examine the other spouse’s community contribution to the business. For instance, if the owner used community funds to improve or market the business or the other spouse worked to support the success and management of the enterprise, the court may determine that the non-owner spouse is entitled to compensation from the community.
Business Valuation and Divorce
Once it has been determined that the business asset is a community or separate property, it will need to be valued. Depending on the circumstances, business valuation during divorce can become complicated and contentious. For example, the spouse who wants to retain the business will often want it to be given a lower estimate. By contrast, the other spouse may contend that the business has a high dollar value. Resolving this kind of disagreement can be challenging.
During a divorce involving a community property business, the each party will hire their own accounting professional to prepare a business valuation. This type of business valuation will ordinarily involve a review and neutral assessment of the company’s assets and liabilities, accounts payable, inventory, and profitability. Once each party’s valuation is complete, the parties can use the financial data to determine how to equitably divide their respective interest in the business.
Determining how to divide interest in a community property business during divorce can be complex, and it’s essential that you work with an experienced California divorce attorney throughout the process. Your divorce lawyer can help you determine the best way to value all of your marital assets and equitably divide your interest.
Contact an Experienced California Divorce Attorney
The attorneys at the Law Offices of Judy L. Burger are experienced California divorce attorneys who can help you before, during, and after your divorce. We assist clients along California’s Northern to Southern Coast, including San Francisco, Beverly Hills, Marin, San Jose, Gold River, San Diego, Santa Barbara, Ventura/Oxnard, and surrounding communities. Call us at 415-293-8314 to schedule a private appointment or visit our website.