Going through a divorce is emotionally challenging, and when you own a business, the stakes become even higher. Building a business requires long hours and years of dedication. When a marriage begins to come apart, the future of the business can become a focal point for uncertainty and conflict.
About half of first marriages end in divorce. In California, a community property state, the division of assets in a divorce can be complex and can significantly impact your business and your future.
Protecting your business during divorce proceedings requires careful planning and consideration. For those whose marriage may be in danger of dissolution, there are strategies that can be employed to help protect a business.
If you do not plan carefully, your ex could become your business partner, or you could find yourself fighting to keep your business from being sold. Alternatively, your ex could become the owner of the enterprise.
This article will guide you through important steps you can take to safeguard your business interests, mitigate potential risks, avoid divorce mistakes, and ensure a smoother transition during divorce proceedings in California.
How Divorce Laws Relate to Your Business
Before taking any action, it is critical to familiarize yourself with the specific laws governing divorce and property division in California. An experienced divorce family law attorney can help you navigate these laws.
California follows the principle of community property, which means that assets acquired during the marriage are generally considered community property and subject to equal division.
However, exceptions, such as prenuptial or postnuptial agreements, can help protect your business from being considered community property. These agreements allow you to define how your business will be treated in divorce, offering protection for your business assets. It is advisable to consult with a divorce family law attorney experienced in business matters to draft a comprehensive agreement that aligns with California’s legal requirements.
- Prenups: A prenuptial agreement is a legally binding contract signed before marriage. If your business existed prior to your marriage, designating it as separate property by using a prenup can help protect your ownership of the business.
- Postnups: A postnuptial agreement can serve to protect your business after you are already married. A postnup is similar to a prenup but is signed after the marriage begins.
However, postnups are more effective if they are agreed upon long before the marriage ends. Sometimes, judges see postnups as less valid.
- A trust: By placing your business in a trust, your business may be protected from being considered a marital asset. This is because using a trust would mean you are no longer the one who owns it.
Sacrifice other assets
In California, typically, a couple’s assets are totaled together and then divided up. By forfeiting other assets instead of your business, such as family income, vehicles, savings accounts, or other items, you may be better positioned to retain ownership of your enterprise.
Be Aware of Your Spouse’s Contribution
If your spouse was actively involved in running or building your business, they may be more entitled to its ownership when a divorce occurs. The more prominent your spouse’s role and the longer the time they were involved in the business, the better the case they have in the court’s eyes that your spouse should benefit from the business.
Knowing your spouse’s contribution to the business while you were married can help you shape your expectations of business ownership after a divorce.
Maintain Accurate Financial Records
During divorce proceedings, the court will closely examine your business’s financial records. It is essential to maintain accurate and organized records to establish the true value of your business and protect it from any attempts to misrepresent its actual value or that of related assets.
Keep detailed records of income, expenses, assets, liabilities, and transactions to present a clear picture of your business’s financial health. Additionally, missing or inaccurate records could lead the court to believe you are not acting honestly. This belief could result in the judge losing confidence in your side of the argument.
Keeping the family’s finances separated from your business will help protect your business during a divorce. Borrowing out of the house account to pay for company expenses can make it appear that your spouse contributed more to the business.
Value Your Business Properly
Determining the accurate value of your business is crucial during divorce proceedings. Consider hiring a neutral valuation professional who specializes in valuing businesses.
When a court-appointed evaluator is used, getting an outside party to review the value can be especially important before any agreements are made. Make sure you obtain a fair evaluation of your business’s worth.
Evaluators will assess factors such as financial statements, market conditions, industry trends, and goodwill to provide an objective valuation. Properly valuing your business will prevent undervaluation or overvaluation disputes and ensure a fair division of assets.
Explore Buyout or Co-ownership Options
If you co-own the business with your spouse, explore potential solutions such as a buyout or co-ownership agreement. A buyout allows one spouse to purchase the other’s interest in the business, effectively transferring ownership.
Both parties are required to agree in the case of a buyout. Additionally, you will end up paying more than half of the value of the business. Because businesses will continue to generate wealth after the divorce, your spouse will likely be owed an amount to compensate for the wealth they would have earned if they still owned half of the enterprise.
On the other hand, a co-ownership agreement outlines the terms of continued business operation and the responsibilities of each spouse, providing a framework for managing the business together post-divorce. However, co-ownership is only in document form, and this could mean that one spouse will simply earn income with minimal involvement in the company.
Nonetheless, depending on your relationship with your ex these options can help preserve the business’s continuity while mitigating conflicts.
Seek Professional Divorce Family Law Guidance
Navigating divorce proceedings, especially when a business is involved, is complex. It is essential to seek professional guidance from both legal and financial experts.
Additionally, consider Los Angeles divorce mediation in the event of a divorce. Divorce mediation provides a more amicable way to negotiate the terms of your divorce with less contention and without lengthy court proceedings.
Consult an experienced Woodland Hills divorce attorney who understands the intricacies of business valuations and asset division in California. It may also be beneficial to work with a skilled accountant or financial advisor who can provide guidance on tax implications, financial planning, and potential strategies to protect your business.
Protect Your Business
Divorce proceedings can be challenging for business owners in California, but taking proactive steps to protect your business can make a significant difference.
Protecting your business during divorce in California requires careful planning and help. Understand the laws, maintain accurate records, be aware of your spouse’s contribution, consider prenuptial or postnuptial agreements, value your business properly, and explore buyout or co-ownership options. Focus on the future and try to maintain a more amicable relationship with your ex to help lessen friction during the divorce proceedings.
Perhaps most importantly, seek guidance from a divorce family law attorney to help you navigate these complexities. You may want to seek out the best divorce lawyers in Los Angeles.
Following these steps can help safeguard your business and provide a smoother transition during divorce proceedings. You can navigate divorce proceedings in California with greater confidence and protect the business you have worked so hard to build.
About Family and Divorce Lawyer, Leon F. Bennett, Esq.
The Law Offices of Leon F. Bennett provide efficient and effective Family Law services throughout Southern California for over 35 years that satisfy you and your family’s goals. Leon F. Bennett, Esq. is an expert family law attorney in Woodland Hills, Ca., who will get the desired results for you and your family. Contact us today to request a consultation.