- Is your business a marital asset?
- How to get a valuation of your business
- The challenge of dividing a business
- FAQ
Getting a divorce can make your head spin. For business owners, there may be some extra headaches involved.
Owning a business in a community property state like California may mean the spouse who owns the business needs to give up a little more in divorce. Or not. It depends on several factors related to the marriage and the business.
Is your business a marital asset?
Generally speaking, a business owned by one spouse would be considered a marital asset subject to marital property division in divorce. However, there are some nuances to consider in the definitions of community property and separate property.
Community property
In a California divorce, “community property” refers to any asset or debt acquired during the marriage. This includes businesses that were started during the marriage. In most cases, both spouses have an interest in the business. Hence, it would be evenly divided between them in the divorce process.
Separate property
If one spouse owned the business before getting married, it may be considered separate property. This means that only that spouse has an ownership interest in the business, and it is not divided between the spouses during the divorce – or at least not entirely divided between them. (In some cases, the non-owning spouse may have a claim to a small percentage of business assets or profits that occurred during the marriage.)
How do you get a valuation of your business?
One way to get a valuation of the business is to hire a financial professional. This can help ensure the value is accurately assessed. It can also help you make sure both parties are treated fairly during the divorce.
The financial professional can also provide valuable guidance during your divorce negotiations. For example, they can identify potential issues that could impact the value of the business and suggest solutions.
If a spouse establishes or acquires a business with separate funds, tracing will need to be done to apportion the separate property and community property interests. If the party making a separate property claim fails to perform an adequate tracing, the business investment will be presumed to be entirely community property. Note that any increase in the value of a business or profession attributable to community skills, efforts, or industry is community property.
Generally, the value of a business is derived from the worth of its fixed assets, accounts receivable, liabilities, and, in some cases, goodwill. Using this information, there are three primary ways to find its value: the asset approach, income approach, and market approach.
- The asset approach uses a formula of assets minus liability to reach a value.
- The income approach looks at the profit or income generated by the business.
- The market approach calculates value by comparing the business to similar businesses that have recently been sold.
The challenge of “dividing” a business
Dividing up business interests can be especially difficult in a 50/50 state like California where both spouses have an equal stake in the business. There are a few possible outcomes for divorcing couples in this situation.
- The couple could decide to sell the business and split the proceeds evenly. This may be the simplest solution but also the most difficult.
- One spouse could buy out the other spouse's share of the business. This can be a good solution if the business is doing well and one spouse wants to keep it running. But buying one spouse’s interest in the business can be expensive, especially if there is a lot of debt associated with the business.
- The couple could continue to run the business together. This can be risky if great tension exists between the spouses, but it can also be a way to avoid losing money on the sale of the business.
Each of these solutions has its pros and cons, and couples should carefully consider their options before making any decisions. No matter what happens, it's important to remember that dividing a business can be difficult, and there is no perfect solution.
A closer look at the possibilities
Fictional divorce scenarios with different outcomes can help illustrate some of the possibilities.
- Scenario 1: Joe and Mary are getting a divorce after 10 years of marriage. Mary owns a successful software company, while Joe has been a stay-at-home dad for the past five years. They decide to sell the company and split the proceeds evenly. This solution allows them both to walk away with some money and avoids conflict over who gets to keep the company.
- Scenario 2: Bill and Sarah are getting divorced after five years of marriage. Bill owns a construction company he built from scratch, while Sarah has been a stay-at-home mom for the past three years. Bill wants to buy out Sarah's share of the company so he can continue running it without her involvement. This solution allows Bill to keep control over his company and Sarah to walk away from the marriage with some additional funds.
If you and your spouse own a business together in California, you may need to divide it during your divorce. Common ways include the following: a 50/50 split, full sale of the company, or one spouse buying out the other.
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FAQ about splitting a business in a community property state
Will I have to sell my business?
There is no one-size-fits-all answer to this question. In general, the courts in California will attempt to divide community property, including businesses, equally between spouses. However, there may be circumstances where it would be inequitable to do so or where one spouse would be unable to continue operating the business without the other. In those cases, the court may order the sale of the business.
What if I co-own my business with a third party?
If you have a co-ownership with a third party, a court won't require that third party to be involved in your divorce. Thus, the business would likely continue to operate. However, a court may order you to sell your portion of the business to your co-owner so the court can evenly split the business proceeds between you and your spouse.
How does “partial ownership” of a business work in divorce?
For a fair division of assets in a divorce, a court may order the business-owning spouse to give partial ownership to the other spouse. Especially for successful businesses, this can be a way to make sure both spouses receive an equal distribution of assets in their divorce settlement.
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