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What happens to your family business when you divorce?

If you are like many Californians, you and your spouse own a family business. Now that the two of you have decided to divorce, what happens to that business? Given that California is a community property state, do you split it 50-50? Do you continue to run it together after your divorce? Does one of you buy the other out? The answers to all these questions become very complicated very quickly, especially if your business is your biggest asset.

You and your spouse own the following types of property under California’s community property laws:

  • Community property: all property and income you and your spouse acquired during your marriage, unless you signed a prenuptial or postnuptial agreement stating otherwise
  • Separate property: property you or your spouse owned prior to your marriage and certain property you acquired during your marriage such as inheritances and gifts
  • Quasi-community property: separate property that you and your spouse commingled during your marriage and therefore has characteristics of both community and separate property

Complicating factors

As explained by Inc.com, it is this quasi-community property that usually presents the most complicated issues. For instance, if you owned your business prior to your marriage, it was and is your separate property. However, if your business has increased in value since your marriage, that increase is community property. In addition, if your spouse works in the business or has otherwise contributed to it, this is yet another complicating factor in determining how much of the business is yours and how much is his or hers.

Because of complicating factors such as these and many others, you would do well to consult a knowledgeable, experienced high-asset divorce attorney as soon as possible. In addition, you and your spouse undoubtedly will need the services of a business evaluator who can determine how much your business is worth and how much of that value belongs to each of you.

Post-divorce options

Basically, you and your spouse have the following options when it comes to determining the fate of your business:

  • You continue running the business together.
  • One of you buys the other out.
  • You agree to sell the business and split the proceeds.

Each option has advantages and disadvantages, and there is no easy or “proper” answer. Much of your decision may rest on the extent to which each of you is involved in and has passion for the business. If both of you are heavily involved in its day-to-day operations, you may decide that you can work together even though you cannot live together. You may be surprised to learn that many divorced couples with family businesses have discovered that this is a workable arrangement. If that is what you and your spouse decide to do, however, you should seriously consider drafting a buyout agreement that sets forth the amount or percentage of the business’ value one of you will pay the other if you discover that you cannot continue running it together after all.

If you decide on an immediate buyout, your next decision of necessity will be how, if you are the remaining spouse, you will pay your spouse for his or her share of the business. If you have other major marital assets, such as real estate, stocks, retirement funds, etc., you may wish to use them to trade for your spouse’s business share in lieu of cash. If you choose a cash buyout, or this is your only option, you may wish to consider giving your spouse a property settlement note whereby you will pay him or her over time with interest.

If all else fails, you can agree to sell your business and split the proceeds. While this is your least preferable option in terms of the business itself, it can give both of you substantial cash in a relatively short time assuming it sells quickly. If, on the other hand, your business remains on the market for a long time before selling, you and your spouse will have to continue running it together until the day arrives when you can stop being business partners as well as house mates.

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