Many business owners understand that if they divorce their spouse, they may have some liability to pay spousal support, but did you know that you also may have to buy your spouse out of your business?
Generally, husbands and wives share an equal interest in all community property, which includes all property acquired by a person during their marriage except that which was acquired by gift or inheritance. Many people do not realize that their businesses are also subject to division
under community property law. Thus, if one party is awarded the business after a divorce, the other party will have to be compensated for their one-half share in the business. This rule also applies to business owners who opened their business prior to the marriage. If you opened your
business before you married your spouse, your spouse could still have a one-half community interest in the value of the business for the period of time the business was operating during the marriage. That information may sting a bit for many business owners, but the tricky part comes
in determining what value to assign to the business.
The fair market value is generally used to determine the value of other marital assets for purposes of dividing the marital estate, but that does not always work for a business where a personal service is involved and the business is not susceptible to transfer. Often, an accountant
will be retained by one or both parties to determine the value of the community business. Various factors will be included in the business valuation such as accounts receivable, liquid assets (cash on hand), furniture and other equipment, debts and liabilities, and also goodwill. Retaining an accountant to value the business can be very costly, especially in cases where each spouse has retained their own accountant as their expert and the court is presented with two conflicting opinions.
Many business owners have a difficult time reconciling the concept that their business is community property where their spouse has had little to no involvement in the management or operation of the enterprise. Nevertheless, the business is a community asset and must be divided
according to community property law. It does not matter if your spouse refused to help you manage your restaurant, or refused to come into your office and provide assistance when you needed it. Your spouse may have never set foot in your store, but they may still be entitled to
one-half of the community interest in it.
One way to avoid the great expense and difficulty associated with valuing and dividing a business is to contract yourself out of the community property system entirely by obtaining a prenuptial agreement before you are married. California community property law dictates that
community property be divided equally between the parties, but if the parties agree, they can make up their own rules and do away with the constraints of community property law altogether.
A prenuptial agreement may be an attractive option for a business owner who is not yet married, but what are the options for business owners who have already entered into a marriage contract and thus bound themselves to the laws of the California Family Code? Married persons
are free to enter into post-nuptial agreements which allow the parties to change the community property rules to fit their specific needs after the marriage has taken place. These agreements can be entered into at any time, and it is generally beneficial to reach an agreement before a divorce is imminent and before spouses have emotions clouding their judgment. If you are a business owner concerned about an impending divorce, or if you wish to eliminate the stress on your marriage that these issues can cause, you may want to consider a post-nuptial agreement.