If you own a business that is growing and prospering, you probably treat it like your own child; investing time, sweat, and tears into it for many, many years. How is it even possible that a judge can order you to split half of your business with your soon-to-be ex-wife?! Is your wife legally entitled to take half of your business in a divorce or does the judge secretly have something against you? Many men scramble to find a way to make it impossible, or rather unappealing, for the wife to lay claim to your business during a divorce. This includes illegal actions such as cooking the books (aka falsifying financial statements). Don’t do that. Here’s a hint to how it ends: it’s not good. Don’t lie about the numbers of your business to try and save your business in a divorce.
This blog post will explain the legal ins and outs of divisions in a divorce, specifically division of a business that you owned while married. Or, you can pick up the phone and give our experienced family lawyer a call for a consultation of your current situation. This is not a simple issue to resolve and we won’t downplay how complex business ownership and a divorce can get.
How is it Legal for My Business to Be Split in a Divorce?
A business owned and operated, profitably, is a source of income for you and your family. Just like any source of work income and physical marital property, a business is considered an asset. Assets are evaluated and given a monetary value or worth, which allows a court the ability to divide marital property and assets fairly between the spouses in a divorce.
Since California is a community property, no-fault divorce state, everything acquired during the marriage is owned by both spouses – equally, 50-50. But wait, there is a potential loophole word in the previous sentence – during. If you started the business before you and your wife got married, you may have a legitimate argument. Your business that was started before the marriage may, in fact, be separate property. At the least, some part of the business will be separate property, if not all.
What If I Started This Business Before We Got Married?
If you started the business before you and your wife got hitched, the “ownership” of this property depends on a few different facts. Below are some questions that will need to be answer to figure this out:
- How long before the marriage did you start the business? Was it 6 months? 3 years? 10 years?
- Before the marriage, what were the company’s assets and how profitable was it?
- When you got married, how much was the business worth?
- Compared to when you first got married, if the business now more profitable, less profitable or the same?
- If there was a change in value of the business, was it due to joint, marital efforts? Did your wife help with the business? Did you invest community money into the business?
The answers to these questions will give your lawyer and the judge a better idea of how much of the business should be considered separate property and how much of it is community property that should be split up in the divorce.
What Happens if This is a Family Business That Was Passed Down to Me by My Parents?
Occasionally, a person might be blessed with an already-established business from their family. This business might have been in the family for decades, passed down from one son to another and another. If you are the newest owner of a family-owned business, your family, you might be rightfully worried about being the one that loses the family business. It is possible that this business that was passed down to you may be subject to discussions of division in your divorce.
Even if the business was given to you during your marriage, there is a way to keep it as separate property. Here are several different things that would keep your family business from being split in the divorce:
- Be able to prove that the business was a gift to you and only you, which creates separate property even if you are married at the time.
- Have a lawyer write up a post-nuptial agreement that says the business is yours and it cannot be split in case of a divorce. If the business was given before you were married, you can have this written into a prenuptial agreement
- Never hide assets from your spouse
- Keep everything of the business separate from the marital/community property. This means keep the funds in a separate account and don’t use community monies to invest in the business. Furthermore, paying your spouse properly if she does work for the company may prove to be helpful, as well as making sure that business property (cars, electronics, inventory) is not comingled with community property
A family business that is given to you may be treated like a family inheritance. California provides a major exception to inheritance when it comes to asset division in divorce. If a spouse acquires a gift or inheritance while married, it would still be that spouse’s separate property. It is important that you are able to prove separate ownership with financial records or other relevant documents though.
If I Have a Business Partner, Can She Still Be Given Half of the Business?
As explained previously, your business may be separate property, community property or partly community property based on several factors that will have to be reviewed in court. When there is a business partner involved, things can get more complex. The business valuation process is complicated when there are business partners involved. When we say partners, we’re including individual business partners, fellow shareholders, or members of LLCs who also have some form of ownership interest in the company.
Business valuation is when the business is analyzed and given a value based on assets and profits at the time of the divorce. The professional evaluator (called forensic accountants) will determine the value of the business and be able to tell you how much of the business is community property or separate property. It’s very important that you have a paper trail to prove that the business partner(s) is/are genuinely invested in the company and it’s not just a way for you to keep the business from being split in the divorce.
We strongly recommend working with an experienced family attorney who can help you figure out what information or documents to gather to prove that this business is truly your own and not belonging to both you and your wife.
How Can I keep My Business from Being Split in the Divorce?
Just like with any other asset or property, it is possible to still keep your business separate even when you are married. No matter if you started the business before or after the marriage, you can make the business separate property. One recommended method is to ensure that you only use separate property funds.
Here are some types of funds that are considered to be separate:
- Savings you had before the marriage
- Start-up funds that you raised or was given to you
- Money that family or friends gave to you in support of your business
- Money that you inherited from family and kept in a separate bank account
If you use funds from any of the above sources to start the business and continue to keep any funds going in or out of the business separate, then it’s safe to consider this business your separate property. Of course, this is with the assumption that there is not even a single piece of evidence to prove otherwise. That can mean, accidentally using a joint credit card instead of a business credit card to make a business purchase; even if you pay it back with business funds.
In addition to making sure that the funds came from separate property and remain separate property, it’s also important to consider how much community time was invested into building the business. If your wife contributed to the business through some type of labor, it will be considered in the business valuation. We can’t say if this will cause a community property part to the business without knowing what and how much she contributed. Talk to a lawyer or forensic accountant to figure out your situation.
What is Double Dipping, when Dealing with a Divorce?
When it comes to divorce and splitting finances, there’s something you should be aware of: double dipping. This is a slang term that means something along the lines of paying both spousal support with business profits and having to split the value of the business too. The basic idea here is that your wife is asking for more than 50% of the business!
For example, Anna was awarded 25% of the business because half of the business was funded with community money. She was also awarded a monthly spousal support amount of $4,000 which Jared paid for with the profits from the business he ran as a sole proprietor. The business only makes $6000 per month in profits, but has assets totaling $40,000. After all, Jared takes home less than $2,000 per month (after taxes) and owns $30,000 of assets that are depreciating every day. In the long run, the ex-wife is getting a lot more than she should from the business.
We’re not going to lie. There are cases where this happens, but it shouldn’t. Double dipping is not fair in anyway, for you, the divorcing business owner. So, how can this be rectified? In the circumstance that you have to pay spousal support from your business profits and split the community portion of your business, there should be an adjustment made. The adjustment amount depends on your specific situation and the facts presented in the divorce case.
Here is the Short Answer to the Question, “Will My Wife Get Half of My Business if We Divorce?”
If you don’t want to take time to understand all of the above, here is the quick and dirty answer: we can’t tell you. Unless this business was started together as a married couple, there is a lot more to the process of finding out if you have to split your business. The number one identifying action here is characterization and valuation of the business. You need an expert forensic accountant and experienced family lawyer to help you determine how much of the business is your own separate property and how much of it is community property that will be split in a divorce.
The future of the business is also taken into consideration, along with: type of business, industry, revenue, gross versus net profit, & how much you and your wife contributed to growing the business. There is no standard answer for a question like this because every couple’s situation is different and no two businesses are identical.