Business Interests Are Property
A business interest is property. It should be disclosed and addressed in a California divorce if either spouse owns or claims an ownership interest.
A business may have value even if it does not have large cash reserves or obvious physical assets.
- sole proprietorships
- professional practices
- partnerships
- limited liability companies
- corporations
- S-corporations
- closely held businesses
- family businesses
- startups
- franchise interests
- real estate holding companies
- online businesses
- consulting businesses
- side businesses
- ownership shares in another company
Community Property Business Interests
A business may be community property even if it was started or acquired before the marriage with separate property funds. If a spouse works in the business and increases its value through labor during the marriage, there may be a community portion to the business.
A business does not have to be owned by both spouses to be relevant in divorce. Even if only one spouse is listed as the owner, the community may still have an interest if the business was created, acquired, operated, or increased in value during the marriage.
A community interest may also arise from community funds being invested in the business or from the business being started during the marriage.
The community interest may include the value of the business, business assets, business income, retained earnings, goodwill, equipment, inventory, accounts receivable, contracts, or other business-related property.
Mixed Community and Separate Property
Many businesses are mixed property. A business may have a separate property component because it was owned before marriage, and a community property component because it increased in value during the marriage.
A business may also involve both separate capital and community labor.
When a business has both community and separate components, the divorce may require valuation, tracing, apportionment, reimbursement analysis, and careful judgment language.
Ownership Documents Matter
Business ownership documents can be important in divorce.
However, ownership documents do not always answer every divorce question. A business may be titled in one spouse's name but still have a community interest. A spouse may also own only a percentage of a business, which may affect valuation and division.
Not every business is the same, which can make valuation for division purposes difficult.
- operating agreements
- partnership agreements
- corporate records
- stock ledgers
- buy-sell agreements
- tax returns
- shareholder agreements
- formation documents
- ownership certificates
Valuing a Business
Business valuation is often one of the main issues in divorce.
A business may be valued based on income, assets, market value, goodwill, cash flow, revenue, expenses, contracts, accounts receivable, inventory, equipment, liabilities, and other factors.
The appropriate method depends on the type of business and the available financial records.
In more complicated cases, valuation may require a business appraiser, forensic accountant, or other expert review.
- income approach
- asset approach
- market approach
- capitalization of earnings
- discounted cash flow
- book value
- appraisal of equipment or assets
- valuation of goodwill
Business Goodwill
Goodwill may be part of business value. Goodwill generally refers to the value of a business beyond its physical assets.
It may come from reputation, customer relationships, brand recognition, recurring revenue, professional skill, location, contracts, or other business advantages.
Professional practices and service businesses often raise goodwill issues. Goodwill may be difficult to value, but it can be a significant part of the business interest.
Common Ways to Divide a Business
A business is not always physically divided. In many cases, one spouse keeps operating the business while the other spouse receives compensation for the community interest.
The right approach depends on the business, ownership structure, value, debt, and whether both spouses are involved in operations.
- one spouse keeps the business and pays an equalizing payment
- one spouse keeps the business and the other receives other assets as an offset
- the business is sold and proceeds are divided
- the parties continue joint ownership for a limited or permanent period
- the business interest is valued and assigned to one spouse
- the parties agree to waive claims to the business
- the court reserves jurisdiction over certain business issues
Buyout of a Business Interest
A business buyout means one spouse keeps the business and pays the other spouse for their interest. The buyout amount may depend on the value of the community interest, business debts, reimbursements, tax issues, discounts, and whether the buyout is paid in cash, installments, or through an offset against other property.
A buyout agreement should clearly state the amount, deadline, method of payment, interest if any, security if any, and what happens if payments are not made.
Offsetting a Business Against Other Assets
Instead of paying cash, one spouse may keep the business while the other receives other property. For example, one spouse may keep the business while the other receives more home equity, cash, retirement funds, vehicles, or investment accounts.
Offsets should be handled carefully because business value may be uncertain, illiquid, tax-sensitive, and dependent on future performance.
Sale of a Business
In some cases, selling the business may be considered. A sale may be appropriate if neither spouse can buy out the other, if the business cannot be valued reliably, if both spouses are essential to operations but cannot continue working together, or if sale is the only practical way to divide the asset.
A sale provision should address broker selection, listing price, authority to accept offers, payment of business debts, sale costs, tax issues, and division of net proceeds.
Continuing Joint Ownership
Some spouses continue owning a business together after divorce, but this can be difficult.
Continuing joint ownership may require clear rules about management, compensation, distributions, decision-making, buyout rights, accounting, tax filings, and dispute resolution.
If spouses do not have a strong working relationship, continued joint ownership may create future conflict.
Businesses Started After Separation
A business started after separation may be separate property, but there can still be issues if community funds, community assets, or existing marital business opportunities were used to create it.
The date of separation can therefore be important when analyzing business interests.
Reimbursement Claims Involving a Business
Business interests may involve reimbursement claims. These issues can affect the final equalizing payment or overall property division.
- separate property invested into a community business
- community funds invested into a separate property business
- post-separation payments toward business debts
- use of business funds for personal expenses
- use of personal funds for business expenses
- loans between the spouses and the business
- unpaid compensation
- business assets purchased with mixed funds