Divorce is complicated and overwhelming. Separating two intertwined lives is a long, stressful process. Owning a business with your spouse adds another layer of complexity to the procedure. You have to figure out how to operate your business during and after the divorce.
To decide how you want to handle your business during the divorce, you must first understand your options. Depending on how much control you want to keep over the business, you have three different options.
Dividing a Business During a Divorce
There are a few options for divorcing spouses to divide a business. The path you choose to take depends upon how much control you and your spouse would like to keep over the business.
Regardless of how you choose to proceed, you should find a team of experienced professionals to help you through the process. Dividing a business is complex, and doing it incorrectly could have lasting repercussions for you financially and personally.
If you have other complications to consider, like debt, third-party agreements, or other owners, the case can become even more overwhelming. With guidance from a lawyer and other experts, you can ensure that you navigate the process properly and achieve your desired outcome in the face of these additional challenges.
Community Property
Before discussing your options for dividing your business, you need to know how divorce works in California. As a community property state, California requires spouses going through a divorce to divide any property or debt acquired during the marriage equally.
If a spouse owned property or an asset before they married, they would likely maintain ownership of the asset. However, in many cases, spouses contribute significantly to their partner’s business even if they do not own it, meaning they are entitled to some portion of the business during the divorce.
When a business is divided during a divorce, the court will factor in the extent of contributions by both spouses. Even if only one spouse owned the business before the marriage, the other spouse often becomes involved in the business. They may make sacrifices, whether financially or personally, or contribute portions of their income to business operations.
Before a business is divided between spouses, it must be assessed for its current market value. There are usually three approaches to determining the value of a private business: the asset approach, the market approach, or the income approach.
No matter which type of approach is taken, the valuation will require a qualified assessor. While it is easiest to hire a single appraiser, in some cases, each spouse may choose to hire their own expert. Should the case end up in litigation, the judge will choose between the two experts based on the credibility of the valuation.
Once the business has been valued, there are three options for divorcing spouses. They may choose to co-own the business, have one spouse buy the other’s share, or sell the business entirely.
Co-Owning the Business
It is uncommon for divorcing spouses to continue co-owning a business after their separation. Even during the most amicable divorces, many spouses prefer not to maintain the close contact required by business partnerships.
However, should spouses continue operating a business together, they should draw up a formal written agreement that clarifies each partner’s exact responsibilities. This contract will help resolve conflict should it arise and explain what is expected from each spouse.
Furthermore, co-owning a business means that it does not need to be professionally evaluated. Because it is not being sold, either to the other spouse or to a third party, there is no need to spend money or time having it valued.
In some situations, one spouse continues to have primary management responsibility while the other takes a passive role and receives a percentage of future profits. Should a couple choose this option, they still need to create a contract formally outlining the specifics of their agreement.
If you decide to continue co-owning your business with your divorced spouse, you need to ensure that you can maintain an amicable relationship. Co-owning a business requires close contact, and you must be comfortable continuing to communicate with your former spouse.
One Spouse Buys Out the Other
The most popular option for divorcing couples is for one spouse to buy out the other’s share of the business. During the divorce process, the business is valued and split in half. Each spouse receives one half of the business, though one can buy back the other spouse’s share.
If the business is a professional service business, the owner may need to have a license to own the business. In this case, the unlicensed partner can sell their half of the business back to the licensed spouse.
Generally, business sales between divorcing spouses are not subject to income tax. This means that the purchasing spouse only has to pay the actual price of the business share. The purchasing partner has to have enough cash or liquid assets to buy the other partner’s share, and they do not need to worry about high tax costs.
Selling the Business
The third option for divorcing spouses is to sell the business to a third party. If they choose to sell, they can avoid the potential conflicts of co-owning the business or purchasing shares back.
Once the business has been sold, the profits are divided equally between the spouses. However, before deciding to sell, they need to consider the economic conditions and their business’ potential profitability.
Some businesses can take years to sell. Until it is sold, the business must continue to be managed and run. Additionally, spouses may disagree about a price offered by a buyer.
Protecting Your Business Ahead of Time
If you are married and own a business, you can take measures to protect your business ahead of time. No matter how unlikely divorce may seem, it is always good to prepare for any possibility.
Many spouses share the responsibilities of owning a business, which is why married couples need to put protections in place that prevent messy or contentious situations. Divorce is incredibly complicated, and preparations made ahead of time can ease tensions and facilitate an amicable resolution.
Whether you choose to implement formal or informal agreements, remember to keep discussions about the topic positive and respectful. Your goal is to prepare for unlikely scenarios, not create conflict. Try to come to a mutually satisfactory agreement that you both feel comfortable committing to.
Contractually
Contractual agreements are formally and legally binding. The most common options are prenuptial and postnuptial agreements, which can ease the stresses of divorce should it occur.
In your nuptial agreement, you can document guidelines about how your business will be valued and divided. You have the option to address each aspect of a possible divorce and minimize future ambiguity and conflict.
Non-Contractually
You also have the option of non-contractual or informal preparations. There are various ways for you to establish informal precautions to protect your business in case of divorce.
The first thing you can do is establish yourself as the sole owner of the business. Make sure that you have documentation clarifying that your business cannot be transferred in a possible divorce.
If your spouse is involved in your business in any capacity, ensure that you are paying them a reasonable amount. Regardless of how large a role they play, by paying them, you are making sure that they cannot claim they are owed a part of the business.
Keep detailed records that show where any capital invested in the business came from. With these records, you can prove that you have been the sole funder of your business and that your spouse has not contributed any of their income or personal funds.
You should also separate your business and personal expenses. Because marriage qualifies as a personal part of your life, keeping your business expenses separate can help demonstrate that your spouse has not contributed to the business financially.
While these measures are not as effective as formal contracts, they can help ensure that your business stays yours in the case of a divorce.
Why You Need a Lawyer
Working with a lawyer during your divorce is essential to increasing the likelihood of the divorce resolving in your favor. Especially with the additional complications of a business, you need to hire a qualified attorney to help you achieve your desired outcome.
While it is a good idea to work with a lawyer during any divorce, your lawyer can help mediate negotiations between you and your spouse if you are going through a particularly contentious separation. They can ensure that you receive the results you desire from the divorce, helping you maintain control of your business or get your fair share of the profits from it.
Now You Know
Owning a business while going through a divorce can be incredibly complicated. You and your spouse have to negotiate ownership, management, and profits and figure out how your business will operate during and after the divorce.
Working with a lawyer during the process can ease tensions and help you achieve the outcome you desire. An experienced divorce attorney can fight for the results you want from your separation, whether that is maintaining ownership of your business or getting your fair share of the profits from it.
For San Diego residents, Shorb & Connor APC is a family firm staffed with qualified and experienced attorneys to help you navigate your divorce. They can help you separate your life and business from your spouse with the least amount of conflict.
Contact Shorb & Connor APC today for a free case evaluation.
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