In any California divorce, the spouses must divide their community property. Some types of assets and debts can be split evenly between the spouses, but for others this division is much more complicated. Ownership stakes in a business are notoriously hard to divide in divorce.
Under California law, almost any property acquired by the spouses during the marriage becomes part of the community property, and so if one or both spouses started or bought a business during the marriage, that business becomes part of the community property. If one or both spouses became co-owners of the business during the marriage, their share of the business is community property.
In some cases, even if one spouse owned a business before the marriage, some of the business’ value can become community property, as well. For instance, if the business increased in value during the marriage, the other spouse may have a strong claim that this increased value should be included in the community property.
There are many ways to divide a business in divorce. None of them are particularly easy. Many can be highly disruptive to the business.
Decide in advance
As with so many things in the law, the best way to solve this problem is to plan ahead to avoid the dispute. Many business owners achieve this through executing a prenuptial agreement that specifies how the ownership of the business should be treated in the event of a later divorce.
Under California law, a prenuptial agreement must be in writing and signed by both parties. Each party must be represented by independent counsel. Prenuptial agreements can’t legally dictate child support or spousal support obligations, but they can largely control property division, so that in case the marriage ends in divorce, the division or property will be decided in advance.
A prenuptial agreement can save a lot of time and frustration in any divorce. In a divorce where a business is part of the community property, it can be extremely important.
Those who own a business, or who are thinking about starting a business, should speak with a lawyer about their options before they get married. If it’s too late for a prenuptial agreement, business owners can ask about the possibility of a postnuptial agreement.