Is Your Business a Divisible Asset In Divorce?

Key Takeaways:

• California is a community property state, and your business is a divisible asset, but there are scenarios in which it will remain separate.
• One factor that has a massive impact is when, where, and how it was founded.
• If your business predates your marriage, it will, at least in part, likely be viewed as separate property.
• Did the business value increase, decrease, or remain unchanged during the marriage?
• If community funds were used for investment, that would be taken into consideration.
• If the business is divisible, there are several ways to move forward.
• One partner can buy out the other and continue to run the company, which is the most common.
• You can continue as business partners, which may be possible in an amicable split.
• One spouse becomes a silent partner, while the other takes over the day-to-day.
• If an agreement can’t be reached, you may be forced to sell the business and divide the proceeds.

During a marriage, your life becomes intertwined with your spouse’s. Possessions often belong equally to both parties, which is a significant reason the division of property is such a contentious part of a divorce.

Splitting belongings at the end of a union often gets heated and complex. And this situation is further complicated if you and your spouse are both business and life partners.

Can Your Business Be Divided During a Divorce?

A divorce when you own a business presents unique challenges. This raises several issues you need to address as you go through the process.

With that in mind, here are some considerations to keep in mind as you go.

Your Business Is A Divisible Asset

Whether it’s an accounting firm, a construction company, or you repurpose thrift store clothes to make dog outfits, your business means a great deal to you.

Though you have an emotional connection, it is, at the end of the day, an asset with real-world value. Since California is a community property state, your business is divisible.

There are scenarios in which it remains separate, though.

Related Reading: How are Assets Split in Divorce?

The Origin Of The Business Matters

One factor that has a massive impact on your business’s fate in a divorce is when, where, and how it was founded. If you and your spouse started a company together during your marriage, it may be considered community property in California and treated as such in the divorce.

If not, however, other factors impact its status, or at least help determine how much of the business is eligible for allocation.

If your business predates your marriage, it will, at least in part, likely be viewed as separate property.

The court takes into account the value of the business at the time of your marriage versus at the time of your divorce. It also examines whether that value increased, decreased, or remained unchanged. If community efforts helped raise the value, that plays a part.

For example, if you invested in the company, but those funds came from resources shared with your spouse, that impacts the final settlement.

If a business is passed down from a family member, the court may consider any community time and property used to benefit the company.

If you started a business with capital from outside investors, that impacts how much qualifies as separate or community property.

Options For Dividing A Business

When it comes to dividing up a commercial venture between spouses in a divorce, you have a number of ways to proceed.

One partner buys the other out

The most common strategy is for one partner to buy out the other and continue to run the company as usual.

This works best when there is unequal interest in the business and when one spouse is more involved in the day-to-day operations.

Divide and Conquer

Perhaps you and your spouse are business partners in name only, and you run the business. If that’s the case, this may be a good way to move forward and may benefit both parties.

Depending on the circumstances, it may be possible to divide a particular business, with each party running their portion.

For instance, if you and your spouse are accountants, each with your own set of clients. You may be able to split things down those lines.

Related Reading: How Is Debt Divided in Divorce?

Work Together

Though your marriage may be ending, that doesn’t always mean your business partnership has to conclude.

If a split is amicable enough, you may be able to continue with business as usual.

Perhaps the two of you simply didn’t work as a married couple, but can continue to coexist professionally.

This obviously depends on the nature of the divorce and the relationship you maintain afterward.

Sell The Business

If you and your spouse are unable to reach an agreement on how to split your business, you may have to sell it and divide the proceeds. Though also an option, this comes with its own set of dangers.

Whether your company sells and for how much depends on many factors. Like what line of business you’re in, the demand, and the competition. Even in the best of circumstances, the odds are not great. Some estimates put the share of small businesses selling on the open market at approximately 30%.

Related Reading: Divorce Discovery Tools