Owning and operating a profitable business demands significant investments of time and money. In a high-net-worth divorce, a business is typically one of the highest value assets. California’s community property laws can create serious challenges for business owners during divorce, making it crucial for business owners to take proactive steps to legally secure your interests. 

What Do California Divorce Laws Mean For My Business?

California is a community property state, where any assets and debts acquired during marriage are generally considered jointly owned, marital property. Separate property includes assets you owned before marriage, or assets you received as a gift or inheritance during marriage.

If you started your business before marriage, its original value from your pre-marital efforts and investments may be considered separate property. However, any income earned and any appreciation in the value of the business during your marriage may be treated partially or fully as community property. The appreciation of the business is more likely to be considered community property if the non-owner spouse contributed to the growth of the business financially or through time, effort, or support.

Will My Spouse Get Half Of My Business In Divorce?

Community property is divided equally upon divorce in California. However, a prenup can often override California’s community property laws, helping to protect your business in the event of a divorce. 

Without a prenuptial agreement, you could be at risk of losing half of a business you founded during marriage—or half of the increase in value of a business founded before marriage—to your ex-spouse, even if they didn’t directly contribute to its success. 

That said, if you don’t have a prenup, effective legal strategies are still available to help protect your business interests. You can negotiate a custom out-of-court settlement to retain control and ownership.

How Can I Protect My Business & Avoid Losing Half In Divorce?

If you don’t have legal counsel and planning in place, divorce can put your business at serious risk. It is essential to work with an experienced high asset divorce attorney and understand the legal strategies that help minimize the financial risks and long-term setbacks of divorce.

Prenuptial Agreement: Establishing Businesses As Separate Property

If you are a business owner planning to get married, a prenuptial agreement is one of the best legal strategies for protecting your assets, such as company profits, ownership shares, capital, and investments. 

Your attorney can draft a prenup in which both parties expressly waive any community property interest in the business. Your prenup can also include explicit clauses that address business ownership, income rights, intellectual property rights, and claims to future earnings.

• Your business, along with any rights to profits generated and any appreciation in its value, are to remain separate property, regardless of whether it generates income or whether your spouse contributes to its growth during marriage. If you wish to compensate your spouse for their contributions to the business while ensuring it remains separate property, your prenup can address this.
• The intellectual property rights of the business belong solely to the owner. 
• The spouse cannot claim ownership or control over the business and the owner retains all decision-making power over the business.
• The established pre-marriage value of the business remains separate property, and any personal or marital funds used to grow the business are not grounds for a claim on the business itself.
• The non-owner spouse waives any claim to future earnings secured after divorce. This clause can prevent the anticipated growth of the business from becoming a factor in divorce settlements.

What If I’m A Business Owner & Got Married Without A Prenup?

A postnuptial agreement can benefit individuals who married without a prenup and became business owners or investors during the marriage. However, postnuptial agreements are generally only enforceable if established before either spouse contemplates divorce.

If you married without a prenup, keeping certain practices in place throughout your marriage can strengthen your argument that, in the event of your divorce, some of your business should be treated as separate property. 

• Maintaining separate bank accounts and financial records for your business and personal finances can help clearly distinguish between community and separate property.
• If you own and operate the company, paying yourself a market salary can help demonstrate that any increase in the business’s value is due to your efforts rather than community efforts.
• Keeping detailed records of any contributions made to the business, including financial investments, time, and effort, can help clarify the nature of your business and whether part or all of it should be treated as separate property.

Formal Business Valuation: Equitable Division In A High Asset Divorce

While California’s community property laws generally mean that marital assets get divided 50/50 in divorce, spouses can negotiate a custom settlement out of court. 

Even if you don’t have a prenup, you may be able to secure full ownership of your business by offering a cash buyout for the value of the percentage your spouse is entitled to. Alternatively, you can offer to exchange other marital assets of equal value, such as the marital home, real estate, investments, retirement assets, vehicles, or other property. 

A common concern in high-net-worth divorces is that a non-owner spouse may attempt to inflate the business’s value in order to negotiate more payment or more valuable assets in exchange. Therefore, objective financial data is fundamental to fairly dividing assets and debts, especially when complex assets or several businesses are involved. Accurate business valuations protect business owners from the financial burden of overpaying in a buyout or conceding too much in an exchange of assets.

At Kaspar & Lugay LLP, our attorneys work with experienced forensic accountants and business valuation experts to determine the fair market value of the business based on the date of marriage and date of separation. This gives business owners peace of mind in knowing that the resulting settlement is grounded in comprehensive, factual analysis. 

Call Kaspar & Lugay LLP To Mitigate Business Loss in Divorce 

The sacrifices and years of hard work of being an entrepreneur or business owner make it especially important to be aware of how divorce will affect your business, particularly in community property states like California. 

Both the tangible and intangible assets of your business deserve careful valuation, strategic negotiation, and experienced legal guidance to secure an equitable outcome. Kaspar & Lugay LLP provides comprehensive legal support on protecting your interests in a high-asset divorce, as well as expert guidance on managing debts and taxes.

Schedule a consultation with us today and learn how we can help you protect your business.

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