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Understanding Your Interest in a Spouse’s Business in a California Divorce

If your spouse has full or partial ownership of a business – whether that ownership is based on active participation in running the business or merely a passive investment not involving day-to-day labor or management – you may be entitled to at least some portion of the value of the business in a California divorce.

Determining how much value of a spouse’s business you are entitled to in a California divorce, and then undertaking the efforts to ensure that you in fact receive that value through a family law court order or settlement agreement, can be one of the most complicated aspects of divorce.

But an experienced CA family law attorney will have both the tools and understanding of how state law affects business ownership in a divorce to diligently work towards ensuring that you receive the portion of the business that you deserve under California law.  

When Was the Business Started?

An initial question to look at in dividing the value of a spouse’s business in a divorce is to look at when the business was started. Specifically, was it begun prior to the marriage or during the marriage?

This is a complex topic with numerous exceptions and intricacies that can affect your particular situation, but if the business was started during the marriage with funds that were also earned during the marriage, then a court will likely rule that both spouses have a 50/50 property interest in the value of the business. This is based on the concept of community property (which says that all earnings and assets acquired due to efforts of either spouse during the marriage belong to the marital community), and this 50/50 division will apply even if one spouse never participated in running the business.

But if the business was begun prior to the marriage, the other spouse can still be entitled to at least a portion of the increase in value of the business from the date of the marriage through the date of separation, or some other value based on the owner-spouse’s efforts. This is explained further below.

You Are Entitled to Value Related to Your Spouse’s Efforts During the Marriage

If a business was started by a spouse prior to the marriage, then that initial value of the business as of the day of the marriage will likely be considered separate property, meaning it will stay with the other spouse. But, again, any increase in the value of the business over the course of the marriage could, at least in part, be reached by the other spouse.

There are two general approaches California courts take in looking at this issue. The first (called the Pereira method) looks at whether the increase in the value of the business over the course of the marriage was primarily due to that spouse’s efforts, e.g. going into the business and managing it over the course of the marriage. In such a case, a court will be more likely to say that the increase in value of the business is community property, and so each spouse should share in that increase (in other words, [the current value of the business] – [the value of the business on the day of marriage] = [the increase in value of the business]) on a 50/50 basis.

The other approach (called the Van Camp method) will apply when the business increased in value for reasons other than the owner-spouse’s ongoing participation, e.g. if the spouse made an investment as a silent partner prior to the marriage and only occasionally took part in running the business. In such a case, a court may determine that the other spouse should receive some amount of compensation for the owner-spouse’s contributions to the business during the marriage, but not receive a 50/50 interest in the overall increase.

Again, these are complex issues, and you are strongly advised to work with an experienced CA family law attorney in addressing them.

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.

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