Is Your Business Subject to Division in a Divorce?
California is a community property state, which means that assets acquired during your marriage (i.e., from the time you are married to the date of separation) can be divided in a divorce. Thus, if your business is a marital asset (i.e., assets acquired during your marriage) or has become commingled, it will be subject to division.
What Is a Commingled Asset?
An asset can become commingled when separate property (an asset owned by one spouse before marriage) is mixed with community property (assets acquired during the marriage). Consider this scenario: Spouse A owns a bakery and purchased the business years before they married Spouse B. The bakery would generally be considered Spouse A’s separate property.
However, during their marriage, the couple starts using their joint marital income to purchase equipment, renovate the bakery, and pay for ongoing operational expenses. While the original bakery itself might be considered separate property, the value it gains due to these commingled funds becomes community property. This necessitates a breakdown of the bakery's value.
The court would need to determine the bakery's pre-marital worth (separate property) and the increase in value attributable to the marital contributions (community property). The increase in value would then be subject to division between the spouses.
Commingling most commonly occurs with bank accounts, inheritances deposited into joint accounts, or using separate property funds for a down payment on a house with subsequent mortgage payments coming from community funds. You should speak with your attorney, as they can help you connect with a forensic accountant, business valuation expert, or other professionals who can help with the business valuation and asset tracing process.
Dividing Business Appreciation in a Divorce
While a business itself remains separate property, the appreciation in value during the marriage can be considered community property due to the contributions of the other spouse or the combined efforts of both. Two primary methods are used to determine the appropriate division of this appreciation: Pereira and Van Camp.
The Pereira method focuses on the spouse's efforts during the marriage as the primary driver of the business's increased value. The separate property investment is assigned a fair rate of return, reflecting what it would have earned if invested elsewhere.
The remaining appreciation is then considered community property, subject to equal division between the spouses. This method benefits the spouse who significantly contributed their skills and labor to the business's success.
The Van Camp method attributes the business's appreciation primarily to market forces or inherent business characteristics. Under this approach, the separate property retains its original value, and any increase is attributed to factors beyond the spouse's control. The community receives no share of the appreciation. This method favors the spouse who owned the business before marriage and whose efforts may not have been the sole driver of its growth.
Dividing a Business in a Divorce
Some approaches to division to consider include:
- Buyouts. One spouse can purchase the other spouse's interest in the business. This option allows one party to retain control while compensating the other fairly. Payment terms, such as a lump sum or installments, need to be negotiated. It is important to note that certain insurance plans can accumulate cash that can be liquidated, which can help with buying out the other party.
- Sale and division of proceeds. The business may be sold, and the net proceeds are then divided between each party.
- Convey and adjust. One spouse may be awarded ownership of the entire business. To ensure an equitable distribution of assets, the spouse receiving the business may relinquish a larger share of other marital assets, such as the family home or investment accounts.
Protect Your Business from Division
You can take steps to protect yourself and your business. Prenuptial and postnuptial agreements can clearly define how a business owned by one spouse before marriage will be treated in the event of a divorce.
A well-crafted pre- or postnuptial agreement can designate the pre-marital business and its future appreciation as separate property. This distinction shields the business from automatic inclusion in the community property pool, which typically gets divided equally in divorce (in community property states). The agreement can further specify how future contributions by the non-owning spouse will be handled. For instance, if the spouse contributes financially or through labor, the agreement can outline a fair compensation method, separating their contributions from the core value of the business.
Contact Our Firm for Reliable Counsel
The attorneys at Family Law San Diego handle property division cases, including those involving businesses or business interests. If you are getting divorced and are worried about what can happen to your business, you can trust our team to answer your questions, offer you honest counsel, outline potential outcomes, and work to develop a case strategy that helps you protect your assets.
Contact us online or via phone at (619) 577-4900 to discuss your divorce and property division case with a member of our team.
