Is a Business Considered a Marital Asset in a Divorce?

A business may or may not be considered a marital asset when partners divorce in California. All property is divided either by ownership, agreement, or court order. Ownership of a business may be determined by when the business was started, who contributed to the operation of the business, and what was agreed to regarding ownership of the business at the time of marriage or afterward. 

When there is no specific agreement about the ownership of a business, ownership can change over the course of a marriage. A business that belonged to one partner before the marriage may have grown to belong to both when they divorce. 

Property Ownership and Marital Assets in California

For purposes of marriage or domestic partnership and divorce, the property is owned either separately by one partner or in equal shares by the community of both partners. California law states all property acquired by a married person during the marriage is community property. Whatever property belongs to the community makes up the marital assets to be divided in divorce. 

Property that is not community property is considered to be separate property. Separate property is the property a married person:

• Owned before the marriage
• Acquired during the marriage by gift or inheritance
• Collects as the rents or profits generated by separate property

Who Gets the Business When Partners Divorce?

When a business is started after a couple marries, it will be community property and the business value will be divided equally between both partners even if only one partner actively worked in the business. A business that was separately owned by one partner prior to the marriage or acquired as separate property after the marriage can lose its separate character depending on the actions of the partners. 

Commingling Separate and Community Assets

Dividing separate and community property can become more difficult when the property is part separate and part community owned. When care is not taken to keep separate and community property from getting mixed together, the property is presumed to belong to the community. 

For instance, if one partner collects the rents from a separate property and deposits them into a community bank account, the rents will become community property. 

Community Contributions to the Value of a Separate Business

Community contributions to a separate business will give the community a right to share in the increased value of the business over the course of the marriage. How that value will be calculated in divorce will depend on the amount of involvement the community had with the business.

When the business owner has little active involvement, and the value increase is mostly due to factors other than human effort, a reasonable annual salary will be assessed for the contributions of the owner. The annual salary multiplied by the years of marriage will be the value of the community interest in the business. 

If the business owner was quite involved in the operations of the business during the marriage, the increase in value from the time of marriage will be determined and a reasonable rate of annual return assigned to the business owner. The increase in value beyond the assigned rate of return belongs to the community. 

Prenuptial and Postnuptial Agreements

Agreements either before or after a marriage can affect the property ownership rights between the partners. California recognizes the right of married couples to alter how the property would otherwise be owned by a separate agreement as long as both people fully understand how they are changing their rights and are not agreeing to something illegal or against public policy.

It could be agreed that a business owned previous to marriage will remain entirely separate property in divorce despite the community contributions to the business. Or one partner could agree to give up in advance any future rights to spousal support payments. 

Any agreement is still subject to court review at the time of divorce to make sure it would not be substantially unfair to one partner if it were enforced.  And spouses cannot agree to anything that would diminish the rights of their children under the law. 

Options for Dealing with a Business as a Marital Asset

To the extent a marital community has an interest in a business, divorcing couples have several options when deciding how to apportion the value of the interest. Once the business interests have been quantified, any of the following might make sense, given the nature of the business and the relationship of the parties divorcing.

• One spouse buys out the interest of another – The spouse who worked in the business may want to continue operating it and choose to exchange other assets for the community interest to gain sole ownership.
• Each spouse keeps a portion of the business – When both spouses contribute efforts to the business, it may be feasible to divide it into distinct components and let each spouse continue to operate a separate portion.
• Sell the business – Selling the business cashes out both the community and separate property interests and allows for easy division of the property.
• Close the business – If the business cannot continue to operate after the divorce it may be necessary to close the business, sell the business assets and divide the proceeds.
• Continue to operate the business as co-owners – For certain people, it may be possible to continue to work together and operate a business after divorce. 

For married couples who operate a business, getting a divorce can potentially affect the livelihood of the family and create unanticipated hardship. Pre-planning can help ease the transition by making important decisions regarding the business while everyone is still on their best behavior. 

It seems counterintuitive to make a plan about getting a divorce before getting married. But the statistics tell us that the divorce rate in the United States truly is about 50%. From a business perspective, it makes as much sense to plan for a divorce as it does to plan for a wedding.

Understanding how marriage affects property ownership in California can help couples make informed decisions about how they want to own their business both during the marriage and in the event of divorce. 

If you need help with a divorce case, call 619-299-9780 to schedule a free telephone consultation or contact a San Diego family law specialist here.