How Are Business Assets Divided in Divorce
Divorces can require complex financial analysis, especially when a divorce involves high net-worth individuals or complicated assets such as business ownership. How should the parties or court divide a business that is owned partially or entirely by one or both spouses? Read on to learn about the division of business assets in a divorce, and reach out to a dedicated Claremont property division attorney with any questions or for help with a California family law matter.
Is a Business Community Property?
First and foremost, the only assets that are subject to division in a divorce are community assets. Community property includes any property (cash, business holdings, retirement account, real estate, etc.) that was either earned or acquired with earnings during the marriage. If the property was obtained due to efforts expended during the marriage, then it counts as community property and is subject to division. Separate property is not subject to division. Separate property includes assets that predated the marriage, inheritance or gifts acquired during the marriage, and rents or profits derived from separate properties.
If a business is owned or operated by both spouses, then it is clearly community property. However, even if one party started a business before the marriage and they were solely responsible for expanding the company during the marriage, the appreciation in value of the business may still be at least partially community property. The efforts expended to grow the business occurred during the marriage. Additionally, business profits were earned during the marriage. Absent a prenuptial agreement to the contrary, so long as there were efforts put into building the business during the marriage (from the date of marriage until the time of separation), then at least a part of the business likely constitutes community property.
Dividing Business Interests
If a business is started by one spouse during the marriage with funds earned during the marriage, the business is entirely community property. Things are more complicated if the business was started before the marriage or purchased/founded with separate property. A California court will need to determine two things: (1) the value of the business, and (2) the portion of the company that can rightfully be called community property. The value of the part of the business that is community property will be divided roughly equally between the parties.
If one party owns and operates the business (especially if it is a private practice such as an accounting firm or dental practice), that party will likely get to retain their ownership and control of the business, but they will owe the other spouse the value of half of the portion attributed to community property. How a court will apportion the increase in the value of the business depends on how the business grew.
California courts typically use the “Pereira method” where the growth of the business throughout the marriage is largely attributable to efforts made by either spouse during the marriage. The increase in value becomes community property. For example, if a business were worth $50,000 before the marriage and grew to be worth $100,000 by the time of divorce, $50,000 would be separate property, and $50,000 would be community property subject to division.
If the growth was primarily attributable to external factors, such as where one spouse is a director or limited partner and has little actual responsibility for developing the business, the court might employ the Van Camp method. The community would only get the value of the owner-spouse’s efforts in building the company during the marriage. So, in the above example, the court would decide how much of that $50,000 increase was “actually” due to the efforts of the owner-spouse, and only that much would be community property.
Either method involves complex calculations, and each party will have a different point of view on how to do the valuation and apportionment properly. Speak with your seasoned property division attorney to discuss your business interests and learn how your business may be divided in a divorce.
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