For spouses who have not only a large number of assets and liabilities but also a business, divorce can become a real test. To protect their interests in a divorce with a business involved, parties need to determine whether it is their separate or joint ownership and learn more about the basic property distribution laws in the state.
In this article, we will analyze the possible consequences of divorce for business owners and the methods you can use to divide business assets during a marriage dissolution in California.
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Will I Lose My Business in a Divorce?
If you are a business owner, divorce does not necessarily mean losing it after the process is finalized. The outcome of a divorce concerning a business depends on many circumstances. The decisive factors among them are the types of divorce and business ownership.
Depending on whether your case is uncontested or contested, you can decide who will own the business after the marriage dissolution yourself or leave it up to the judge. The time when the business was established is also important. If you became a business owner before marriage, it will most likely be considered your separate property and not be subject to division in court. If you started a business after getting married, it will be a part of your joint possessions and shared between you and your spouse, like other marital property.
Sometimes, business ownership can change from sole to joint even though it was founded before marriage. It can happen when one of the spouses starts it before getting married, but the other contributes to its increase in value during the marital life.
What is Community Property as It Relates to Divorce and Business?
California is a community property state, meaning all possessions acquired during the marriage, including business, are divided equally between both spouses in a divorce.
According to California community property laws, if there is no other oral stipulation or written agreement between parties, the court will aim for a 50/50 division of ownership in a dissolution of marriage (CA Fam Code § 2550).
The list of shared community property in California may include but is not limited to:
- Real estate.
- Cars and vehicles.
- Jewelry.
- Bank and retirement accounts.
- Business, etc.
No matter whose name is on the title, all assets and liabilities that are not separate possessions are subject to division.
Sole property includes assets acquired before marriage, gifts intended for one of the spouses, and inheritance. Exceptions to the general rule are property bought during marital life but specified as separate in prenuptial or postnuptial agreements.
So, if you are interested in the question, “If my husband owns a business, do I own it too?”, the answer cannot be unequivocal and depends on case-specific circumstances. If your spouse started it after the marriage or before it, but you invested in its development, you will most likely be considered its owner.
How Are Businesses Divided During Divorce?
What happens to a business during a divorce depends on the agreements between spouses or the judge’s decision.
If you have an uncontested case, you can independently decide how to divide the business or who becomes its sole owner after a dissolution of marriage. Here are some approaches you can use:
- Sell the business and share the profit. If neither of you wants to be a business owner after the marriage ends, you can sell your shares and split the proceeds. This method is appropriate if neither of you strives to keep the business for yourself. However, it may not be suitable if the market situation is unfavorable, and its sale may lead to a loss of the expected profit.
- Buy out the other spouse’s share. If one of the spouses wants to own the business in the future and the other agrees to sell their share in it, they can hire a professional appraiser to assess its value and enter into a sales agreement. In this situation, one of the parties receives monetary compensation for their part of the business, and the other becomes its sole owner.
- Change the business to another asset. In case either spouse wants to be a single business owner but does not have enough money to buy out the other party’s share, they can agree to exchange assets. As a result, one of them receives a business, and the other gets a family home or other property equal to its value.
- Continue joint business ownership. If parties can maintain friendly relations and want to continue developing the business together, they may not sell or divide it but determine their shares and become its co-owners after the divorce.
If spouses have disputes regarding the business division, they need to ask the court to decide for them. But how are business assets divided in divorce with the judge’s intervention? When dividing a business in a divorce, the court is guided by the current state laws and will take into account:
- The time it was started.
- Participation of each spouse in its development.
- Income and standard of living of the parties.
- Terms of other assets and liabilities distribution, etc.
Since business can be difficult to divide in half, judges may resort to assets exchange between spouses or its sale and dividing the proceeds. However, each situation is unique, and the court’s final decision may depend on many factors.
Ways to Protect Your Business from a Divorce
No one can guarantee that you will remain a sole business owner after a divorce. However, there are several ways you can protect your interests in business in case of marriage dissolution. Let’s analyze them in more detail.
Marital Agreement
To determine the list of separate and joint property and the terms of its division in case of divorce, spouses can sign a prenuptial or postnuptial agreement.
Prenups are concluded by parties before getting married to determine what possessions belong to each spouse at the time of marriage, how they will be divided if they decide to divorce, etc. Most often, divorce with a prenup guarantees that upon ending the marriage, you will receive assets and liabilities listed in the agreement.
Postnups are contracts signed by parties after the marriage. What should be included in a postnuptial agreement? The list of terms specified in it can be similar to a prenup and include the financial obligations of both parties, their agreements regarding the distribution of property in a divorce, etc. Typically, a postnuptial agreement may have less impact on the outcome of a marriage dissolution; judges may not always follow them and determine divorce terms based on other factors. However, any pre-divorce agreements will affect the business division in a divorce.
Buy-Sell Agreement
If parties want to limit the other spouse’s rights regarding the resale of their share in a business, they can sign a buy-sell agreement. It can be a type of prenuptial agreement and determine at what price and to whom either spouse can sell their share of the business. This contract can be relevant in resolving the issue of buying out business assets from one spouse by another.
Shareholder Agreement
Concluding a shareholder agreement, parties may determine their shares in the business, which can help to stipulate the terms of its division in a divorce. In it, spouses can also indicate the main principles of managing their shares. They can agree on their rights and responsibilities in making business decisions and the list of persons they can transfer their shares to.
Business Structure
Another option for protecting business assets is restructuring the business into a limited liability company (LLC). In an LLC, spouses’ shares are defined and interests are protected. However, your own share can also be subject to division in court during a divorce.
Is a limited company protected from divorce? The short answer is no. Even though the parties’ shares are determined, they can still be divided in court if the company is their marital property.
The advantage of forming an LLC is that it helps you protect your interest within the limits of your shares. However, it does not guarantee that they will not be distributed between you and your spouse in a divorce.
Who will own the business and whether you can remain its sole owner after the divorce process is finalized may vary from case to case. The least time-consuming and stressful way to resolve the issue of business assets distribution in marriage dissolution is to agree on it with the other party and conclude a marital settlement agreement.