One of the more complicated issues in a California divorce is figuring out how to divide the property interests in a business either wholly or partially owned by at least one of the spouses. Things can get especially tricky when the business was started prior to the marriage. There are also several questions to be answered either through a mutual agreement between the spouses or an order from a family court judge, including who will have control/ownership of the business after the divorce and what financial interests the other spouse will have in the business.
Community Property and Your Business
You or your spouse may have started and built a business with zero direct assistance from the other spouse, but if any efforts were put into building that business during the time of the marriage (in other words, from the date of the marriage to the date of separation, which is the date at least one spouse decided to end the marriage), then at least some portion of the business will be considered community property.
What is community property? In California divorce matters, community property is any property - which can be cash, business holdings, retirement accounts, real estate, furniture, vehicles, etc. - that was earned during the marriage or acquired with earnings during the marriage. Basically, if the property came about as a result of your efforts during the marriage, it is community property. In a divorce, all of a couple’s community property will be added together and divided 50/50 between the parties.
This does not mean that a judge will take a chainsaw and split your sporting goods store in half, but we will get to exactly how a family business is divided a bit later.
When a Business is Partially Separate Property and Community Property
Based on the above, if one spouse started a business during the marriage with funds earned during the marriage, then the current value of the business is considered 100% community property.
Things get more complicated when the business was started prior to the marriage OR the business was founded with capital consisting of separate property, which is funds or other property belonging to one spouse prior to the marriage (or gifted to one spouse specifically). In such a case, the business will be considered to consist of both separate property and community property.
California courts have two different methods for determining how to determine what portion of such a family business should be considered community property: 1) the Pereira method, and 2) the Van Camp method (both named for California family law cases).
The Pereira method applies where the growth of the business over the course of the marriage is largely attributable to efforts made by either spouse during the marriage. In such cases, the court will consider the increase in value of the course of the marriage to be community property. For example, if a business was worth $100,000 when a couple married, and is now worth $300,000 at the time fo the divorce due to the efforts of the owner-spouse, the court will consider $100,000 to be separate property, and the $200,000 increase in value to be community property.
The Van Camp method applies where the growth in value of the business is primarily due to external factors, such as where one spouse is a limited partner in a business with few responsibilities and the growth is due to the efforts of other owners and employees. In such a case, the community will only get the value of the owner-spouse’s efforts in building the business during the marriage, i.e. a $20,000 a year “salary” for the spouse’s efforts as a limited partner.
Who Actually Gets the Business?
If a business is indeed community property, then the spouses will need to come to an agreement on who will actually own and operate the business after the marriage or a judge will have to impose a decision. Ideally, the spouses will work together in reaching an agreement, and the spouse who is actually best equipped to own and run the business will take on that role. If not, a judge will have to make a reasonable decision on this issue.
Keep in mind community property is split 50/50 in the aggregate, as opposed to every single asset being cut in half, which would be an absurd result. Thus, if the total community property is worth $1.2 million, and the business is worth $400,000, one result is that one spouse gets the business and $200,000 worth of other property, while the other spouse gets the remaining $600,000 worth of property.
Get Answers to Your California Family Law Questions
At Kearney | Baker in Pasadena, we represent spouses through all aspects of the dissolution/divorce process. Our partners, Brian A. Baker and Gary W. Kearney, are both Family Law Specialists, as certified by the California State Bar. To schedule a consultation regarding any questions about family law in California, contact one of the family law attorneys at Kearney | Baker today at 626-768-2945.