California business owners know that to succeed, they must protect the interests of the business at all costs. Although we tend to think of our personal lives as separate from work, this is not the case when it comes to asset division in divorce.
There are many factors, such the type of business you own and divorce laws, that can affect the outcome of a settlement agreement or court order. For example, California is one of a handful of states that follows community property laws, in which both sides usually split marital assets equally and down the middle.
The type of business can determine levels of risk for the company or owner. Unlike S-corporations, corporations are subject to double taxation, for the value of the business and for the dividends or earnings. A sole proprietorship carries the greatest personal risk to the owner.
When did the business become community property?
It can come as a shock to find out how things play out during the divorce proceeding, especially for those who started their business before marriage. The challenge remains in determining what, if any, portion of the business belongs to the community pool, and thus subject to equal division.
When things start to get heated, a few factors that can limit the effect of the divorce on operations include:
- Making sure to keep detailed and accurate records, especially for sourcing capital contributions, as there could be claims that they came from marital funds.
- Not mixing personal and business expenses, as the blurred lines will make it much more difficult for financial and legal teams to determine business valuation and income stream.
- Paying you or your spouse less, which can be a red flag, especially when determining how much income was contributing to the marriage.
- Not reporting income and then living a lifestyle that does not match up with what’s on the books not only may trigger an audit, it makes you an unreliable source.
How would a marital agreement resolve these issues?
It is possible to address these and other issues without creating liability for the company if there is a divorce. A pre- or postnuptial agreement would clarify how much of the increase in value of the business during marriage may belong to the other spouse, and what value their non-financial contributions to the business they can claim.
It is also possible to protect the business from dissolution by including certain provisions in the shareholder, partnership, LLC, or buy/sell agreements, including requiring married shareholders to have a prenup barring the fiancé from future interest, or giving other shareholders the right to purchase business interests of a divorcing spouse.