California is a community property state, meaning that in the event a couple divorces, everything earned from the date of marriage until the date the couple separates is considered the property of the community estate.
This can mean several things for business owners. Many entrepreneurs worry that if they divorce, their spouse will automatically get a one-half interest in their company, which may lead to questionable business practices for owners to attempt to lower the value of their business in the hope that their spouse will find it less appealing.
Having an experienced divorce attorney who is well-versed in California’s property division laws on your side can help you achieve a favorable outcome.
Characterizing The Property
A business might be an asset of the community, and so, as with all other property, it needs to be assigned a value. However, if the business was formed prior to the marriage, there will likely be a separate property component as well. Determining whether the property is separate or community is called characterizing the property, which can have a significant impact on whether and how it gets divided.
Separate Or Partial Property
If the property was formed with separate property funds, it might be partially or fully considered separate property. But income earned from the company would be considered community property. Sometimes, it is necessary to have some idea of what the value of the business was immediately before the marriage to determine how much value it has earned over the course of the relationship.
The first step is determining the type of property the business is (Separate or community), and then assigning a value to each portion. Very often, this involves the expertise of a forensic accountant, who can trace and analyze funds and values of businesses. This can be an expensive endeavor, but keeping good records and enlisting a smart accountant while you run this business can help defray some of the costs.
There might also be an analysis as to how much the business grew as a result of community effort. For example, if a doctor started a business before a marriage, but her spouse ran the marketing campaign, attracting significantly more patients to the practice, the spouse might be entitled to a portion of the business given the ‘sweat equity’ he donated to the business.
Sometimes, family businesses passed down from parent to children, are not automatically considered separate and protected from a division. A competent attorney can help guide you in characterizing the business, but they will need to find out how the business was passed down, whether it was divided among multiple family members, was it a gift or a sale, and other considerations. Sometimes, these family businesses can be partnerships, or LLC’s with multiple members, which can make characterizing and valuing a company even more complex. They will also have a stake in the business and might be concerned about the value as well.
Practically speaking, then, the first step is determining the type of property the business is (Separate or community), and then assigning a value to each portion. Very often, this involves the expertise of a forensic accountant, who can trace and analyze funds and values of businesses. This can be an expensive endeavor, but keeping good records and enlisting a smart accountant while you run this business can help defray some of the costs.
One of the most difficult parts of assigning a value to the company is the evaluation of goodwill. Goodwill is an intangible asset, based on the expectation of business in the future based on their reputation. So, if the company is named John Doe and Associates, and the spouse is named John Doe, there would be some goodwill associated with it, even if the business cannot be sold.
Three Methods Of Dealing With Business Divorce
After characterizing and valuing the company is completed, the question is, how will the business be divided?
There are typically three methods of dealing with a business upon divorce:
- both parties continue to run the business;
- the parties can sell and divide profits; or
- one spouse can keep the business and the other spouse will be given more assets to offset the value of the business.
In many cases, the latter option is the most common choice. But, as this article indicates, the most complex portions of litigation in dividing a business isn’t usually the actual division, but rather, the steps leading up to doing so. If you are a business owner facing divorce, it is critical to get the advice of a property division attorney well-versed in complex estate divisions.The Law Office Of Rebecca Medina serves Fresno, Clovis, and Madera California, along with surrounding cities in the area. Contact us today for your family law needs including divorce, child custody, child support, mediation, spousal support, and judgment modifications.