Divorces can be frustrating, overwhelming, and exhausting experiences for couples who decide to pursue that option. For most people, decisions on child custody, child support, and spousal support are the priorities to settle. However, some couples find themselves in unique situations where one spouse owns their own business, or both have invested in a joint venture. Protecting business in divorce is a task that can leave you with many questions.
Characterizing Business Assets
The first step in a divorce that involves a business is categorizing the assets of the business to determine what part of it is considered community property. In California, most assets are divided equitably between spouses if they are acquired during the marriage. When the business was acquired and the contributions of each spouse to its success will determine its status. Examining the following scenarios to see if they apply to your situation can help you with this process:
- The business was formed before the marriage but grew significantly during it because of the efforts of the managing spouse and/or the market of the business.
- The business was inherited from the parents of one spouse after the spouses married.
- Both spouses started, owned, and operated the business either before, during, or after the marriage.
- One spouse owns a business outright without any involvement from the other in business operations.
These conditions are often the most difficult situations because of how assets are defined and what constitutes a marital asset.
Dividing Business Assets
If a business is to be divided in a divorce, there must be an evaluation of its assets. When a business is part of a divorce, its assets are evaluated to determine its worth, including:
- The building itself
- The contents of the building
- The bank accounts
- Every other tangible and intangible asset
This valuation is done by a third party who will take into account the depreciation of physical assets as well as the stake of shareholders and others who have any vested interest in it.
During the evaluation stage, you and your spouse will need to share financial records of both your business and any personal accounts that you have. This is to ensure that you are not hiding any assets that are a part of the process. If a spouse is found to have hidden assets from the other, they are violating the law, which could negatively impact their right to an equitable settlement.
Like divorces themselves, businesses are unique, and each situation involving a business needs to be treated uniquely and independently of others. There is no straightforward formula to determine how the assets of the business will be divided or how much stake each spouse has. When a business is a shared asset, the ideal situation is to reach an agreement between both spouses on its final status.
Protecting a Business in a Divorce
The circumstances of the marriage and the negotiations in the divorce process will determine the outcome of your business. There are only a couple of real ways to protect your business during your marriage. The first way is through a prenuptial agreement if the business was established before the marriage. The second is a postnuptial agreement if your business could be a part of a divorce once you are already married.
Both of these agreements are made between spouses and determine what a settlement would be in the event of a divorce. However, if you are unable to implement one of these agreements, and a divorce is imminent, you can consider these options:
- Buy-out. This is likely one of the more expensive solutions. In essence, you determine the value of the company and then buy out your spouse’s ownership of or claims to it. The business then becomes yours.
- Co-ownership. This may be an option if you and your spouse are able to maintain a working relationship. The agreement for ownership can work however you and your soon-to-be-ex want it to, but both of you benefit from the success of the business.
In addition to tangible and intangible assets, you will want to consider the protections necessary for intellectual property. These business secrets need shielding so your spouse cannot steal the business away from you by creating a competitor. Defending this type of information may require any of the following:
- Non-disclosure agreement (NDA)
- Non-competition agreement (NCA)
- Social media-related or other confidentiality clauses
Talking with your attorney can help you find the option that is most effective for your situation.
Q: How Do I Protect My Company in a Divorce?
A: The ideal way of protecting your business is to claim it in a prenuptial or postnuptial agreement. Your business may be determined to be community property if it can be proven that your spouse had a part in its success or growth. Keeping it established as a separate asset will prevent your partner from having a claim on it.
Q: How Is an LLC Treated in a Divorce in CA?
A: An LLC is a form of company that allows its owners to only be liable for their share in the business. LLCs can be owned by one person or groups of people. A spouse who is an owner of an LLC, either in whole or in part, has a share in it. That share will be considered personal property. Therefore, it will be subject to equitable distribution in a divorce, with few exceptions.
Q: Is My Wife Entitled to Half My Business If We Divorce in California?
A: The laws governing divorce and business ownership do not take gender into consideration. Regardless of who owns the business or what gender they are, if the business is considered community property, then it is subject to equitable distribution. If the spouses are unable to reach an agreement, a judge will decide during any divorce litigation.
Q: Is a Business Marital Property in CA?
A: A business’ determination as marital or community property is subject to how and when the business was acquired or established. If, for example, you inherit a business as part of a will when your parents pass, but you are married, your spouse is not entitled to that because an inheritance is not community property. Speaking with an attorney about your business and its circumstances can help you identify how your business is classified.
California Divorce Attorney
If you have questions about how to protect your business in a divorce, contact Hayes Family Law and let our team help you find the answers. You worked hard in your marriage, and you built a successful business. When one is challenged, the other shouldn’t suffer.