In the state of California businesses created during a marriage are considered community property under the law. During the asset division process both spouses are legally entitled to half of the business valuation of the community interest in the business. Issues related to business can quickly become complicated in the divorce process, affecting business continuity, tax situations for both parties, future spousal support and general financial standing. However, there are ways to protect your business interests and financial well-being while going through a divorce.
Protecting Your Business
The best way to protect a business when getting divorced as a co-owner is to be proactive. It is important to establish which assets and liabilities are separate property versus community property and detail how they will be divided by using prenuptial and postnuptial agreements in accordance with applicable laws. Such agreements can serve as a valuable tool to eliminate the time and expense involved with negotiating a settlement amidst the stress of the divorce process.
In the absence of any such agreement, there are other legal strategies that can be employed to divide the value of the business equitably and maintain the viability of the business structure.
One way is through a buy-out. This option enables the spouse who wishes to retain the business to buy-out the 50% interest of the community property value the other spouse is entitled to as agreed upon by both parties or by court order. Though expensive, this solution provides the cleanest split to secure the business.
The other way is through co-ownership. Depending on the extent both spouses are able to cooperate they may be able to make arrangements that allow for the continued ownership by both of them. Opting for co-ownership does not automatically mean that the second spouse needs to be involved in decision-making but it does mean that they can continue to receive income from the business.
Beyond careful financial planning and ensuring that your business assets don’t get plundered by the other spouse, protecting your business in a divorce involves safeguarding intellectual property and any proprietary models or “business secrets” used to grow the business. Most importantly, the business or brand reputation may be the most crucial asset. To protect these critical business components you may use one of or a combination of the following ways so long as the parties agree, or obtain these protections via a court order, including:
- Non-disclosure agreements (NDA) or a protective order prevent both parties from divulging any disclosed intellectual property, trade secrets or other proprietary information the business may rely on.
- Non-competition agreements (NCA) prevent either spouse from duplicating the business by using the same products and methods of their ex-spouse to start their own business. An NCA may specify timeframes or geographical limits, outside which a new business may be started, depending on the terms of the agreement.
- Social media or related confidentiality clauses prevent the publication of any information by both former spouses, whether true or not, that is expressly designed to tarnish the reputation of the other and/or their company.
Valuing Business Assets
Since California is a community property state the general rule of thumb for fair division is that each spouse is entitled, with exceptions, to half of any and all assets and liabilities they acquired after the date of marriage and before the date of separation. Any assets or liabilities acquired before or after those dates generally, and with some exceptions, will remain with the spouse who acquired them without any equitable interest gained by the other spouse.
When protecting your business in a divorce, the division of property is often less straightforward and may require input from financial experts who can provide qualified business appraisals to inform any legal agreements made in your case. Such considerations may include but are not limited to the following:
- Some businesses formed before the marriage go on to experience significant growth during the marriage either as a result of market conditions or the work performed by the managing spouse or a mix of both.
- Some businesses are inherited from a spouse’s family after marriage.
- Some businesses are co-created, co-owned and co-operated by both spouses, either before, during or after their marriage.
- Some businesses are wholly owned and operated by just one spouse without any involvement at all or even interest from the other spouse.
The key takeaway is that owning a business brings a complexity to the divorce that requires some strategy and planning with the appropriate professionals. At Buncher Law, we encourage a clear path strategy planning meeting with our managing partner, who is a Certified Family Law Specialist, prior to starting the divorce process. Having a plan and understanding how to prepare for divorce can save many headaches and high litigation costs down the road.