Many spouses open businesses during the course of their marriage. A family business can grow over time and result in both spouses having the majority of their net worth tied to it. But what happens to a business in divorce? In the event that your marriage does not work out, it is essential to understand that your family business is subject to division under California’s community property law. This is why it is crucial to ensure your interests are protected — and that you take the necessary measures to safeguard your business from the consequences of divorce.
In a California divorce, it is first necessary to determine whether a business constitutes separate property or community property. Generally, a business formed during a marriage is community property. If the company was acquired before the marriage, it may be considered separate property. But if the other spouse used separate assets to fund the operations, that portion of their contribution to the business may be deemed community property as a result of “commingling.”
Business assets and liabilities that are considered community property can be divided in one of two ways — either the spouses can decide between themselves, or a judge can determine the outcome. If spouses can come to an amicable agreement, there are several common scenarios regarding what happens to a business in divorce.
In a divorce, spouses might consider the following options:
Spouses should carefully weigh a variety of factors when making a decision concerning their family business pursuant to divorce. Importantly, spouses should consider how well they can communicate, whether it is a good time to sell, and the fair market value of the business. Both spouses can lose out on making a profit if a sale is forced when the business is not at its highest value.
Business valuation can be complex. Critically, California courts will evaluate a number of factors when determining the fair market value of a business in a divorce. Not only will the outstanding debts and liabilities of the company be weighed, but also its fixed assets, intangible assets, and accounts receivable — as well as the business’s goodwill, recognition, and patronage. Additionally, California courts will also look at the financial condition, longevity, economic outlook, and earning capacity of the business. No one factor is weighed more than any of the others.
In many cases, a business valuator may be brought into a divorce case. The professionals produce a report which estimates the current value of the business and projected future value. If both spouses have hired their own valuator who have reached differing conclusions, each valuator may testify in court.
The best way to protect business interests in a divorce is to take proactive measures prior to entering into marriage with a prenuptial agreement. Similarly, if a business is formed during the marriage, spouses might consider a postnuptial agreement. A prenup can not only address what will happen to a business in divorce, but it can also help you avoid lengthy and costly litigation regarding the matter.
Specifically, a valid prenup can establish the current value of the business, decide how it will be divided in the event of divorce, and determine the method that will be used to value it. It can also designate a business as separate property, rather than community property.
If you and your spouse formed a business during your marriage, it’s crucial to ensure your rights and financial interests are protected during divorce. A knowledgeable divorce attorney can advise you regarding the best course of action and help to ensure a favorable outcome. With a focus on providing high-quality legal services and skillful representation, The Law Offices of Rick D. Banks is committed to helping clients achieve positive results in their cases.
The Law Offices of Rick D. Banks has been assisting clients throughout Fresno and the surrounding area with their divorce and family law matters for more than 20 years. To schedule a no obligation consultation, call (559)222-4891.