Splitting a Business in a Divorce

  • 08 17, 2021
  • Irwin & Irwin
  • Divorce

Going through a divorce can be one of the most difficult events you experience in your personal life, and the splitting of personal assets is a process that can take quite a bit of time and cost quite a bit in attorneys’ fees. According to U.S. News, the divorce rate in California in 2019 was 6.5%, while the marriage rate was around 17% nationally, meaning that more than one in three marriages ended in divorce.

While in a divorce, the focus is often on dividing the bank accounts and home that were used by the family prior to the divorce, it is also important to take into account the professional assets of the spouses.

Is your business at risk of being incorporated into the divorce settlement? Might you have to give half of your hard-earned business to your ex-spouse?

Read on to learn what factors determine whether your business will be involved in your divorce, and if so, how it will be split. A California divorce attorney can help shed further light upon this complex and, at times, difficult to clarify situation. To understand the potential risks to your business in the event of a divorce, it is important to know the various things that might happen.

What can happen to my business during divorce?

There are options in this situation, such as:

  • Your former spouse may get half
  • Your former spouse may take partial control
  • Your former spouse may only be entitled to financial compensation
  • Maintaining control is supported by hiring a family law attorney

Dividing property in a California divorce

To frame what happens to your business if you’re going through a divorce in California, it is important to understand how property is divided in California divorces. Property is considered to be either separate property, community property, or some combination of these two types. When you go through a divorce, each member of the marriage keeps their separate property following the divorce. Separate property might be a ring that you inherited from your great grandfather or the individual bank account that you brought into the marriage filled with earnings from before you were married.

When a divorce occurs, and there is community or shared property, then the community property is split equally, or as equitably as possible, between the former spouses. Community property is property that is purchased with shared money or income that was earned during the marriage. Common community property features might be the family home or other purchases made with shared bank accounts and income during the marriage.

Whether a business is community or separate property will depend largely upon the source of the money that funded the business, and who invested time and/or money into the business once it was up and running.

Investment and work are key factors in determining the business’ property status

Whether your business is separate or community property will determine if it is a part of the divorce proceedings. There were some 746,971 divorces in the US in 2019, according to the CDC, with this number anticipated to have grown significantly in 2020 given the pandemic. Property is increasingly being separated through the rise in divorces.

If you exclusively invested into the business, only your name is on the business, and you are the only spouse who contributed time and/or money once the business was up and running, it is likely that the business is considered separate property. However, support is also a factor that must be accounted for.

Were you financially independent when you began the business? Did you have savings that supported you and contributed to household expenses as the business was getting moving? If you relied upon your spouse to support you while the business was getting started, this support might indicate that the business was for the shared benefit of the family.

If one spouse supports the household while another starts a business, that support is, in effect, an investment in the success of the business, with the understanding that the marriage would benefit. This could clarify that the business is community property, and your former spouse may be entitled to a full half of the business.

Without effective advocacy, community property in California is split equally

Situations often arise where one spouse exclusively owns and operates a business, but as noted above, support and contribution did come from the other spouse. In California, community property is by default divided equally. This equal division might not be an accurate reflection of the amount of time and effort that one spouse invested in the business. The goal is to maintain control of your business while ensuring that the compensation your former spouse receives and/or any ownership is proportional to their investment and is fair and equitable.

Should you have a partner in your business that is not your spouse, it is all the more important to ensure that the business is split equitably. Without partnership agreements in place ahead of time, one partner’s divorce could be detrimental to the other. To prevent such a situation from developing, a prenuptial agreement can be highly valuable.

Prenuptial agreements can help your business

A prenuptial agreement can be a strong tool to protect your business interests and keep the business out of divorce proceedings. A prenuptial agreement is a contract between parties that can serve to legally establish the status of your business. Through the prenuptial agreement, you can clarify that the business was yours coming into the marriage and, should the marriage end, will remain exclusively yours.

A California family law attorney can advise you of your options and the advantages of using a prenuptial agreement to protect your business.

A California family law attorney can help you protect your business in a divorce

If you own a business in California and are going through a divorce, connecting with a California family law attorney with experience handling divorces will increase your chances of achieving the optimal outcome. Reach out to a California family law attorney today to learn what factors might influence the disposition of your business in divorce and to have your rights, your property, and your business protected.