Every year, hundreds of California entrepreneurs set their sights on starting a new business, driven by dreams of success and financial independence. When launching a new venture, thoughts of divorce may be the last thing on your mind, especially if you aren’t even married yet. However, it’s important to consider what could happen to your business if you do find yourself facing divorce down the road.
On the other hand, if you are currently in the midst of a divorce, you might be wrestling with a crucial question: should you put your entrepreneurial aspirations on hold until the divorce is finalized? What could happen if you prefer to not wait?
At the Law Office of Renkin & Associates, we have represented many California business owners going through divorce. In this blog, we will go over this state’s community property laws, how they can impact business ownership, and how an experienced San Diego divorce lawyer can help.
California’s Community Property Law Explained
California is one of nine states that follows community property laws when it comes to the division of assets during a divorce. Under this law, any property or assets acquired by either spouse during the marriage are generally considered community property, which means they are jointly owned by both spouses in equal shares, regardless of who earned or acquired them.
During a divorce or legal separation, community property is divided equally between the spouses. Each spouse generally has a right to half of the value of the community property, including businesses, real estate, investments, and other assets. However, there are exceptions to this rule, and not all assets acquired during marriage automatically become community property. They include property inherited by or gifted to one spouse only.
What if You Started Your Business Before Getting Married?
If you started your business before getting married in California, it would generally be considered separate property rather than community property. Depending on the business, the length of the marriage, and other factors, there may be community property in your separate property business. However, there are some steps you should take to maintain its separate property status:
- Keep Finances Separate: It’s crucial to keep your company finances entirely separate from any joint marital finances. Commingling funds can potentially blur the line between separate and community property.
- Maintain Clear Records: Accurate and well-documented financial records for your business can help establish its separate property status. Keeping track of business-related transactions and investments can strengthen your case that the company is solely yours.
If you’re planning to get married, a prenuptial agreement can help clarify several crucial matters related to your business and its treatment during a divorce:
- Business Ownership: You can specify in the agreement that the business you established before the marriage will remain separate property and not be subject to distribution in the event of a divorce.
- Business Appreciation or Depreciation: The agreement can address whether your spouse will share in any appreciation or depreciation of your pre-marital business that occurs during the marriage.
- Methodology for Business Valuation: You can determine in the agreement the method to be used for valuing the business at the time of divorce, ensuring a clear and cooperative approach.
- Ownership Interest and Business Dissolution: In cases where both spouses have ownership interests in the business during the marriage, the agreement can address what will happen in the event of divorce. This includes options such as one spouse buying out the other, selling the business and distributing the proceeds, or maintaining the business partnership despite the dissolution of the marital partnership.
By incorporating these considerations into a well-crafted prenuptial or postnuptial agreement, you can proactively protect your business interests, minimize potential conflicts during a divorce, and provide a clear framework for the division of assets and business ownership.
What to Expect if You Start a Business While Married
If you started the business during the marriage, it would generally be considered community property in California, regardless of who was more actively involved in its operations. This situation can lead to several considerations and potential challenges:
- If you and your spouse started the business together and are both actively involved in its management, you will need to decide whether you want to be the one to continue running the business after the divorce. This decision may be influenced by your passion for the business, your expertise in its operations, and your willingness to take on the responsibilities of sole ownership.
- As community property, the business’s value will need to be assessed and divided equally between you and your spouse. Valuing a business can be complex and may require the expertise of a business appraiser to accurately determine its fair market value.
- If you wish to retain control of the business, you will likely need to buy out your spouse’s share of the business’s value. This process involves compensating your spouse for half of the business’s worth, which could be through cash, assets, or other property of equivalent value.
If you and your spouse have a prenuptial or postnuptial agreement that addresses the division of the business in case of divorce, it can provide guidance and potentially simplify the process.
Considerations When Starting a Business During Divorce
If you’re thinking about starting a business while your divorce is in progress, speak to your lawyer. You may be better off waiting until the divorce is finalized before making such a big move.
While starting a business may seem like an opportunity for financial independence and personal growth, it’s crucial to be aware of the potential risks. An attorney who represents business owners can help you understand the legal implications, protect your interests, and ensure proper business structuring to minimize potential conflicts.
Is My Spouse Entitled to Any Profits After Our Divorce?
If the business was started and generated profits during the marriage, it would typically be considered community property unless a prenuptial or postnuptial agreement states otherwise. As a result, your spouse may be entitled to a share of the business profits accumulated during the marriage, even if they were not directly involved in running the business.
It’s important to note that the community property interest in the business profits is calculated from the date of marriage to the date of separation. Any profits earned after the date of separation are typically considered separate property and not subject to division but are part of the value of the business which will be included in the buyout from the business.
To protect your business interests and ensure a fair division of assets during the divorce, it’s essential to seek legal counsel from a California family law attorney. They can clarify the community property laws, assess the value of the business profits, and help you work toward an equitable resolution.
Questions? Speak to a San Diego Divorce Lawyer Today
Business owners facing divorce can encounter complicated legal considerations and potential challenges. Understanding California’s community property laws and how they apply to your business is crucial to safeguarding your interests.
At the Law Office of Renkin & Associates, we have helped many California business owners navigate divorce. Whether it’s clarifying property rights, valuing the business, or addressing business ownership during divorce, we are committed to providing the representation and support you need during this challenging time. For more information or to schedule a consultation, call 619-304-4760 or contact us online.