Getting Divorced as a Business Owner in California
Due to the financial impact, California business owners often have different sets of concerns during the divorce process. As opposed to non-business owners, California entrepreneurs and business owners have more to lose during the process of asset and property division. It is imperative to navigate the divorce strategically, ensuring that your business is handled with care. For this reason, it is exceedingly common to seek legal assistance when getting divorced as a business owner in California. Without legal counsel, business owners may risk losing their assets to their spouse.
Wine Country Family Law, P.C. is a leading California-based law firm that serves clients across several counties with offices in Santa Rosa, Napa, and Ukiah. As fierce negotiators and experienced litigators, we ensure that the rights and goals of business owners are upheld at every step of the process. We are fellow entrepreneurs who understand the importance of business ownership and if you are getting divorced as a business owner, we are here for you. Consider contacting a knowledgeable attorney at 707-669-0841 to get started today.
How Does Divorce Differ For Business Owners?
In many cases, a thriving business is one of the most important assets within a marriage. It inevitably holds a great deal of value, financially and personally. The stakes are even higher when one or both spouses have invested significant time or money into the business. Because of this, there may be disputes regarding who will receive most, or all, of the business during property and asset division.
Community Property vs. Separate Property
Section 2551 of the California Family Code necessitates that courts categorize property in order to accurately divide or assign liability during the process of divorce. When dividing assets during a divorce, the court will account for two different types of property, namely:
- Community property: In California, when two people join together in a marriage or domestic partnership, then they become one legal entity. In this way, community property is anything that the couple owns or acquired during the marriage, with the exception of inheritance and gifts.
- Separate property: This is anything that has been acquired before getting married or registering a domestic partnership. Inheritance and gifts received during the marriage is considered separate property. Taking this a step further, any items purchased with separate money or income prior to marriage shall be categorized as separate property for the purposes of asset division.
For business owners, this is one of the most important considerations. To understand how the business will be divided when finalizing divorce, it is key to understand how the court will categorize the business. This can be difficult, however, as businesses are quite different from other assets, often involving years of work and contributions from various different parties.
Understanding whether a business is community property or separate property can be difficult. The most straightforward scenario is the case of businesses started during the marriage. Here, the business would be considered community property and will be up for division during a divorce.
Categorizing a business that was established before the marriage is more complicated, however. If your spouse contributed to, worked in, or managed the business in any way, then the business can become community property, even if it started as separate property. Any income derived from a spouse’s labor and effort during a marriage is considered to be community property.
How Can I Prove That My Business Is Separate Property?
California Family Code Section 2581 sets forth the requirements necessary to prove that property, especially property held jointly or in tenancy, is separate property. To establish that a business is separate property, a spouse can leverage either of the following when getting divorced as a business owner:
- A statement, in the deed or other documentary evidence, that the property is separate property and not community property.
- Proof, in the form of a written agreement between spouses, that the property is separate.
The latter option often manifests as a post-nuptial agreement, wherein spouses mutually agree upon how assets will be divided in the future. Post-nuptial agreements, when drafted carefully, can ensure that property and assets are protected from undesirable division. Oftentimes, post-nuptial agreements are used to update already existing pre-nuptial agreements when the financial standing of spouses changes or when new assets are acquired during marriage.
Pre-nuptial agreements are also powerful tools for protecting businesses during a divorce, but they must be drafted and signed before the marriage. This is the fastest and easiest way to protect a business during a divorce. Courts cannot contest any of the terms of a valid pre-nuptial agreement. In order for a pre-nuptial agreement to be valid, it must be written, free of coercion, and include full disclosure. This leaves much room for invalidation. During your divorce, Wine Country Family Law, P.C. can help you contest a pre-nuptial or post-nuptial agreement and advise you whether your existing agreement is on solid footing.
How Are Business Assets Divided in a Divorce?
This culminates into the major question: how are business assets divided during a divorce? Answering this depends largely on the circumstances of your divorce. In some situations, couples can reach an amicable agreement and need not worry about undesirable division of business assets. Alternatively, if spouses are unable to reach an agreement, then the final decision will be made by a judge.
Generally, the first scenario is preferable and allows spouses greater control regarding the outcome of their divorce. It is not always possible for couples to agree on all aspects of who will receive which business assets or liabilities.
When dividing business assets, the judge will take several factors into consideration. Aside from whether the business is community or separate property, California courts will consider:
- How long the business has been established
- The percentage owned by each partner
- Each spouses’ involvement in running the business
- The value brought to the business by each spouse
- How the spouses will divide remaining assets and property
- Whether one partner can buy out the other
It is important to note that the process of property division varies from case to case. Ultimately, the division of business assets is left to the discretion of the court. For this reason, it is key to approach the process deliberately and judiciously. There are, in fact, some strategies that can be utilized to divide property more easily.
Navigating California divorce and business ownership can be highly complicated. Seeking counsel from an experienced attorney at Wine Country Family Law, P.C. can help ensure that all issues are handled carefully and strategically when performing all steps of getting divorced as a business owner and entrepreneur.
If both spouses agree, then a buy-out can be used to resolve the division of assets. If each spouse was ordered to receive one half of the business, for instance, then it is possible for one spouse to buy out the other, assuming both parties agree to the deal.
A buy-out agreement will require you to determine the value of the assets, which will then be used to agree upon a monetary amount. Oftentimes, this amount is much more than the baseline value of the business assets. Business buy-out agreements typically account for the potential to generate revenue, which the seller would be losing out on if relinquishing their half of the business. Thus, the buyer may offer an amount that considers both the actual value of the business in addition to the earning potential of a company or business.
In situations where spouses are able to maintain a healthy working relationship, they may opt for co-ownership. This is not exceedingly popular, however, as it can be difficult for divorced spouses to continue to work together after the dissolution of a marriage. To do so would require a great deal of trust, which may not be evident in the relationship.
Alternatively, both spouses can maintain co-ownership, but merely in title. The spouse who is more highly involved in the company’s ownership and operations may simply write a check for the other spouse’s generated income in the given time-frame.
Selling the Business
Depending on a variety of factors, it may be beneficial to sell the business and divide the profits evenly between both spouses. Disputes may arise regarding the value of the business, identifying a suitable buyer, or even market fluctuations. For example, if the couple wishes to sell the business, but their divorce is being finalized during the middle of an economic downturn, disagreement over when to sell may occur.
There are measures that can be taken, however, to prevent the need to utilize any of these options during a divorce. A knowledgeable California divorce lawyer can help you navigate the process of getting divorced as a business owner. Skilled legal counsel will assess your case and help you determine the best course of action to fully optimize the outcome of your divorce.
How Do I Protect My Business in a Divorce?
It is possible to protect your business during a divorce, especially when you utilize specific precautionary measures before the division of assets and property occurs. In addition to pre-nuptial and post-nuptial agreements, there are some legal strategies available to business owners who wish to protect their companies.
Leverage Company Structure to Lock Out Spouse
When structuring your business, it is possible to include provisions that protect the other owners if the owner gets divorce. Many times, this is done through a partnership, shareholder, and/or operating agreements. A provision may include, for example, a requirement that any unmarried shareholders must provide a pre-nuptial agreement regarding the division of the business and/or a written agreement to be signed by the spouse-to-be.
Additionally, a business owner may utilize stipulations on the transfer or purchase of shares. Drafting a strong, legally enforceable company structuring agreement can ensure that owners maintain control of the business, even in the event of divorce.
Compensate Yourself With Competitive Income
To avoid any potential pitfalls, it can be valuable to pay yourself a competitive salary rather than reinvesting the vast majority of the profit back into the business. This prevents a divorcing spouse from claiming that they did not derive any benefits from the business, therefore requesting greater amounts of money or involvement in the business.
Getting divorced as a business owner can carry with it several unanticipated consequences. In this way, it can be beneficial to prepare for such matters through specific behaviors and agreements. Compensating yourself adequately and enjoying the fruits of your business, are some of those behaviors.
Limit Your Spouse’s Involvement in the Business
If your spouse was greatly involved in the establishment or current operation of the business, then he or she may be entitled to a substantial part of the business in the event of divorce. Spouses who were employed within the business, ran the company jointly, or contributed significantly in some other way typically receive a larger percentage of the business.
To avoid this matter altogether, maintaining distance between the business and your spouse may prove beneficial. Sometimes this is difficult to separate, however, so be prepared for potential roadblocks in this regard.
California Divorce Attorneys at Wine Country Family Law, P.C. Can Help When Getting Divorced as a Business Owner
There is a great deal of complexity and nuance involved in getting divorced as a business owner. As a business owner, you want to protect your company from any undue involvement. This can be accomplished through preparation, foresight, and creative legal strategizing. Navigating the process of divorce as a business owner can be highly stressful and may greatly impact your life and family. Preparing for and addressing matters of business ownership, both before and during a divorce, is crucial.
At Wine Country Family Law, P.C., our team of experienced attorneys work alongside winery owners, tech professionals, and real estate investors, among others, to protect their business from property division during a divorce. In terms of time, money, and resources, our clients have a great deal at stake. We understand and leverage options to benefit them most substantially. If you are getting divorced as a business owner or wish to restructure your private company to account for matters of divorce, consider contacting an experienced attorney today at 707-669-0841.