You’ve worked hard to build your business. Now that you are getting divorced, you may wonder as to the fate of that business – will you get to keep 100 percent ownership or have to split it with your spouse? The answer to this question depends on your specific case. However, in most cases, the courts view a business as community property, meaning it will be divided in a divorce case.
Separate vs. Community Property in California
California is a community property state. This means that in a divorce or legal separation, all of the assets and property owned by the couple will be divided in half. Any property or debts acquired while the marriage is intact are viewed as community property. Separate property is any assets or belongings owned by one spouse before the marriage, or gifts given only to one spouse. Separate property is safe from division during a divorce case. The courts do not have jurisdiction to award one party another party’s separate property.
How Is a Business Divided in a California Divorce?
Business assets that are considered community property are treated the same way as personal assets in a California divorce case. If the case goes to court, a judge will split ownership of the business equally between both spouses. Even if you started the business, owned the business before you got married or were more involved in its daily operations than your spouse, if the courts view it as community property, your spouse can receive 50 percent ownership of the business.
However, if you began the business before you got together and never commingled this asset with your spouse – such as by putting your spouse’s name on business documents or naming him or her as a co-owner – it may be viewed as separate property for divorce purposes. While this could protect it from being divided with your spouse, you may still owe your ex the increase in value (appreciation) of your business that took place while you were a married couple.
Business Appreciation Division
The courts can use two different methods to divide business appreciation: Van Camp and Pereira. The Van Camp Method is used when appreciation of the value of a business is due to market factors and/or capital appreciation. With this calculation, the courts assign a reasonable salary according to what the owner might have received as an employee of the company, then multiply this by the number of years married. From there, the courts deduct any amount paid for community expenses and salary already received. The remaining total is viewed as community property, while the rest is separate property.
The Pereira Method of apportionment is used when the increase in business value stems from efforts made by one of the spouses during their marriage, such as management or labor. In this case, the courts add the original value of the business when the couple got married to a reasonable rate of return. This will yield what is classified as the separate property of the owner-spouse. This amount will then be subtracted from the business valuation amount to come up with the community property amount.
How Can I Protect My Business During a Divorce in California?
If you wish to protect your business in a divorce in California, there are steps that you can take from the very beginning. You can create a prenuptial or postnuptial agreement, for example, that specifically outlines the business and keeps it part of your separate property. You can also be the person who primarily owns and operates the business to avoid having to divide it with your spouse. Do not commingle this asset with your spouse, such as by putting your spouse’s name on registration documents or business cards. Finally, you can contact an attorney to help you come up with a settlement agreement that protects your business as much as possible.