California’s community property law holds that all assets and debts acquired by either spouse during their marriage is owned jointly by both spouses. This means that if the marriage ends in divorce, each spouse has an equal claim to everything in the community property.
In theory, this means divorcing spouses can divide everything in a 50/50 split. In practice, it rarely works out that neatly.
Some types of property are harder than others to divide in divorce. One type that is particularly tricky is ownership of a business.
Separate and community property
If you are beginning the process of divorce, and you, your spouse or the both of you own a business, one of the first questions you mist ask is whether the business must be divided.
Generally, anything acquired during the marriage is community property and must be divided, but anything either spouse owned before the marriage is considered separate property. Separate property does not have to be divided. With that in mind, the business might not be subject to property division if one of you owned it before the marriage.
However, separate property can often be commingled with community property to the point where it’s impossible to separate the two. This is particularly common in marriages of longer duration.
For example, one spouse may have owned the business before the marriage, but the other spouse contributed to the business in a meaningful way during the marriage. In such a case, a court might determine that this contributing spouse has a 10% share in the company at the time of the divorce.
If your small business is subject to property division, you have three possible courses of action:
- You can sell the business and divide the proceeds between you and your spouse according to the terms of your settlement. For instance, if your ex has a 10% share, then they get 10% of the proceeds from the sale of the business.
- You can continue to run the business with your ex as co-owners. This could require executing a partnership agreement or other business formalities.
- One spouse can keep the business. This requires buying the other spouse’s share. This can be a complicated process, as we’ll explain below.
Valuing the business
If you have decided on the buyout option, you must figure out a price. To arrive at a fair price, you will need to determine the value of the business as a whole.
The best way to do this is to hire experts in business valuation. Ideally, both spouses should hire their own experts to make sure the valuation is fair.
Once the parties have their estimates of the business value, they can negotiate a price for the buyout. This comes with complications of its own.
For instance, if the business is worth approximately $1 million and one spouse has a 10% interest, then the buyout price should be somewhere around $100,000. A small business may not have that kind of cash on hand, and so it will have to take out a loan and/or work out some kind of payment plan.