The property division process can be incredibly contentious, and it’s not hard to see why. With valuable assets and hefty liabilities on the line, the outcome of a property division case can significantly affect the financial prospects of participants.
If you own an asset, like a business that provides your livelihood or gives you a safety net (or are married to someone who does), you may be wondering how property division will affect it. Today, we’re here to answer that question for you.
Understanding Separate & Marital Property
In any property division case, there are two types of property: separate, and marital.
Separate property governs assets and liabilities that only you own, and that your partner has not contributed to meaningfully or doesn’t have access to. For example, a gift given to you explicitly for your use only may be considered separate property.
Marital property, on the other hand, governs assets and liabilities you either own with your spouse, or that both parties have contributed to in a meaningful way.
Separate property can transition into marital property over time. For example, let’s say that you own a house before you marry your spouse. After getting married, your spouse pays for a renovation that increases the house’s value. Because both parties have contributed to the home in a meaningful way, it may be considered marital property even though it was initially your separate property.
The same rules apply to businesses. If you own a business and your spouse contributes to it in a meaningful manner, it may become marital property. However, there are exceptions to the rule—for example, stipulations in a pre or postnuptial agreement may prevent certain assets and liabilities from ever becoming marital property.
California is a community property state, meaning that spouses equally own all income, assets, and liabilities acquired during the marriage. It also means that spouses equally split those assets and liabilities if they dissolve their marriage.
How Are Businesses Divided During Property Division?
The objective of courts during property division is relatively simple: Ensure that each party is capable of maintaining the same quality of life post-divorce they enjoyed while married.
How courts choose to divide a business during property division often depends on what the judge thinks they need to do to achieve that goal. If the business is separate property, the owner may be able to keep it in its entirety. However, if both spouses were involved in the business or the business produced income both parties relied on during the marriage, it may be considered marital property.
The first step in dividing a business is valuation. The spouses can either use existing documents (like tax returns) to agree on a value for the business or conduct a formal valuation utilizing a neutral third-party, like a financial professional specializing in asset valuation.
Once the court determines the value of the enterprise, the parties typically have a few options:
- Buyout. If one party wants to retain the business and has enough capital, they can try and buy their soon-to-be-ex out, offering them enough money to compensate them for their share in the company.
- Division. If both parties want to remain involved in the business, they can negotiate an equitable split, and each act as shareholders.
- Selling. If the parties can’t resolve differences over how to handle the business, they can choose to sell it and equitably divide the profits.
- Dissolution. If the parties can’t sell the business for whatever reason, they can dissolve it entirely.
The primary question for many spouses involved in a business is whether they can maintain a functional working relationship post-divorce if both parties want to remain involved in the business.
At Alternative Divorce Solutions, our experienced property division attorneys can help you negotiate an equitable arrangement for your business. We’ll help you pursue the ideal outcome, working with you to protect your rights and assets.
To schedule a consultation with our team or learn more, contact us online or via phone at (949) 558-2624.