California has a divorce rate of 6.7 percent according to U.S. News. While California may not fall into the top tier of divorce rates, everyone understands divorce is not easy and there are always disagreements. One of the primary things spouses typically face challenges with is division of property. Since California is a community property state, making property division even more complicated, you should consult with a family law attorney immediately to ensure what steps you need to preserve your assets.
Understanding Community Property as it Pertains to Divorce
Community property is defined as “joint ownership of all property acquired during a marriage except property acquired by gift or will“. This rule also applies to debt incurred by spouses during marriage. The court deems any property accumulated during the marriage as community property since the spouses equally shared in the acquisition of the property. This means in general, property and debt are generally divided equally between spouses at the time of their divorce.
Businesses Structured as Partnerships or With Multiple Owners
When a business is formed during a marriage in California in general it is considered community property. Should you form a business as a sole proprietorship, the decision by the court is easy: Your spouse would likely be entitled to half the business. There are other complex issues to deal with however including how the business is structured.
Clearly if your spouse is a partner, they are entitled to their portion of the business. However, there may be other partners in the business and there may be specific wording in the corporate documents which indicate each parties rights should they retire, divorce, or die while the business is still operational. In these cases, the family court would likely review the documents in making a determination about the disposition of the business, or the assets of the business.
Spouse Role in a Business May Impact Division
Another consideration which must be part of the discussion about your San Diego business when dealing with a divorce is the role your spouse may have played in the business. However, if your spouse had a part in the day-to-day operations of the business, there is a chance the judge hearing your divorce case may feel they are entitled to a portion of the business. The more involved the spouse, the more likely this is to occur, particularly if you and your spouse cannot agree between yourselves, or if you have an agreement which seems to treat your spouse unfairly. These are issues you should discuss with your family law attorney when you are talking to them about your divorce and your business.
Exceptions to Community Property Rules
In addition to property which one spouse may inherit or have gifted to them, post and prenuptial agreements have an impact on property division. In the event an agreement specifies the business is considered individual property, then your spouse would not be entitled to half. The other case where property may be considered sole property is assets which were owned prior to the marriage. Keep in mind, if a business owner is divorcing and the business was started prior to the marriage the court may deem the business separate property.
When it comes to a business, there may be other complicating factors. For example, if a spouse starts a business using funds which were bequeathed to them in a will, given as a gift, or which they had prior to the marriage, the rights of the spouse may come down to a determination by the courts. In some cases, the court may determine the business is entirely separate property, and in other cases, they may use other, more complicated calculations.
California Courts and Business Ownership
Family courts in California have specific ways to determine what portion of a business is considered community property. The first method is known as the Pereira method and the other is known as the Van Camp method. Here’s how they work:
- Pereira Method – this calculation involves knowing the value of the business at the time of the marriage and the date of separation. Assuming the growth of the business is due to efforts during the time of the marriage, the increase in value is considered community property. If one assumes at the time of divorce the business is worth $500,000 and was worth $100,000 at the time of the marriage, the $400,000 would be considered community property subject to equal division.
- Van Camp Method – this method is used in circumstances where the court cannot determine that you had a substantial role in the businesses’ growth. This method is often used in cases of limited partnerships. In general, a spouse would be entitled to half the “usual” salary earned as a limited partner, and not the value of the business. The reasoning behind this is only that amount of money is considered community property.
Divorces are always complicated, and they become more complex when there are business interests at stake. When there is a combination of community property and separate property, division of assets is challenging. You need to work with an attorney who has experience dealing with complex divorce matters to represent you fairly, and to serve as your advocate. In some instances, we may be able to help you preserve more of your business than you might be able to preserve on your own.
Because community property laws can be confusing when it comes to a business, you need to discuss these issues with your divorce attorney as quickly as possible. We have also assisted those who fear their spouses may be using their business in an attempt to shield assets from divorce proceedings.
We know you have worked hard to grow your business and losing half of your business in a divorce could put your future financial security at risk. When you are concerned about the future of your business because you are going through a divorce contact The Law Offices of Steven M. Bishop, Attorney at Law, A California Corporation at 619-299-9780. We represent people throughout San Diego County in a host of different family law matters.