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As part of the divorce process, many assets and debts will have to be divided between the spouses through a process called equitable distribution, which means “fair” distribution, not necessarily equal distribution.
Assuming the spouses don’t come to an agreement over how to divide their assets and debts, a court will classify property as either community or separate property, place a value on the property, and then distribute between the spouses. California is a community property state. This means that, unless there is an agreement stating otherwise, in California, each spouse or partner owns one-half of the community property. This includes businesses started during marriage, even though it may be one of the spouses that runs and manages the business (here we’ll only be discussing businesses started during marriage, not businesses started before marriage or after separation).
Given community property laws, business owners going through a divorce, the question of whether their spouse may be entitled to half of “their” business often does not make sense. When thinking about “your” business and whether your spouse is entitled to half, nothing at all, or something in between, you have to be logical and leave the emotions at the door. This is understandably difficult when you’re the spouse that has been toiling away and growing a business with blood, sweat, and tears.
But, legally, if your business was acquired during your marriage, there is a presumption that its net value will be divided equally in a divorce. Unless there is an agreement, a formal valuation will be performed to derive the net value. Then the spouses can negotiate whether one of the spouses will be awarded the business and if so, how much will the other spouses get in other assets to make it “fair.”
If you and your spouse own a business but they were the ones that ran and managed it, keep these considerations in mind if you’re going through a divorce:
● Do not assume that your spouse willfully and willingly will disclose all relevant business assets during a divorce. In an attempt to devalue a business, they want to keep, a business owner may lower income reports and shield assets in protected accounts. It is very expensive to litigate this issue, so your best preparation is to gather as much information and be informed about the business before a divorce begins.
● Consider how the divorce will affect your tax situation. Many spouses forget to consider how a divorce will change tax implications during the next tax season.
● Business arrangements are often complex. In a basic sole-ownership business started during marriage, your right to half the property may be clear. However, businesses come in all kinds of structures and from all types of arrangements. Divorces involving complex business arrangements often require the assistance of a forensic accountant who can tease out the value of actual community property in the business. Be aware that forensic accounting work can be quite expensive.
It is important for each spouse to address the pros and cons of all the options for dividing private businesses with his or her attorney, tax advisor, wealth manager, and other professional advisors before agreeing to and implementing any specific strategy.
Give us a call if you want to discuss your situation. We’d love to help you strategize and come up with practical solutions. (909) 377-8141
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