How to Protect Your Business During a Divorce

Assets acquired during your marriage, whether they are personal property or ownership interests in businesses and business assets, are subject to division in a divorce case. When property division issues focus on business interests, the conflict between spouses can heat up fast. A divorce has the potential to impair the rights and responsibilities of a business owner and threaten business operations. Here are some ways you can protect your business during a divorce.

In California, marital property is distributed according to principles of community property. In a divorce, assets that qualify as community property are divided equally between the parties. All property acquired during marriage qualifies as community property. Any property that does not qualify as community property is the separate property of the party who acquired it and is not divisible upon divorce.

Generally, courts will look to the date an asset was acquired to evaluate whether it constitutes divisible community property or the nondivisible separate property of one of the parties. For example, if you purchased a car while married to your spouse, the car qualifies as community property. On the other hand, if you bought a car one year before marrying your spouse—or if your spouse purchased a car one year after the date of final separation but before the divorce—those cars are the separate property of the purchaser.

However, there are some exceptions to this rule. For example, if you used money that you saved up before getting married to buy the car during your marriage, it might qualify as your separate property. This is because the community or separate character of an asset can be traced back to the community or separate character of the assets used to acquire it.

Furthermore, if you started a business before getting married and continued to operate and grow your company during the marriage, any business assets or growth that can be traced to the use of community funds or efforts can also retain the community property character of those funds or efforts.

If you want to protect your rights and interests in your business, you should start by making sure you have a comprehensive record of your company’s operations and transactions. Receipts, bank statements, contracts between your business and third parties, as well as loan documents, can be used as evidence to indicate the community or separate property character of your business and its assets.

If your spouse is involved with your business, you should determine the nature and extent of their involvement. Is your spouse also your business partner, or are they just an employee who receives fair wages for their work? Has your spouse contributed their own earnings or labor to acquiring capital assets for the company?

Once you have determined your spouse’s role in your business—if any—you should keep a record of what they contributed and how it affected your business. You may also want to separate any assets attributed to their contributions from the rest of your business, if possible.

One of the most significant issues that arise in a divorce case involving the division of business interests concerns valuations. In many cases, the court will award a business to the spouse who primarily owns and operates it, requiring them to buy out their spouse’s community property share of its assets. The nonowner spouse has an interest in inflating the value of the business to obtain a higher payout upon settling the property division issues in a divorce case.

The parties will utilize the services of expert witnesses, such as forensic accounting experts and Certified Public Accountants to support their countervailing claims regarding the true value of the business. You can benefit from the services of a financial expert in appraising the business using valuation methods to evidence its fair market value, asset value, or value based on future cash flows.

If you have been confronted with divorce proceedings that deal with complex issues of property division, such as cases involving the ownership of a business, you can benefit significantly from retaining an attorney with experience with California divorce law. At Fenchel Family Law PC, our dedicated team of family law attorneys can deliver effective legal advice while tenaciously advocating for your legal interests.

Please contact Fenchel Family Law PC by calling (415) 805-9069 or contacting us online to schedule a confidential case evaluation with one of our experienced attorneys today.