Question

How is a business divided in a California divorce?

Avi Levy

Answered by:
Avi Levy

Located in Los Angeles, CA
Trabolsi & Levy, LLP

Avi Levy - Family Law - Super Lawyers

Answered by: Avi Levy

Trabolsi & Levy, LLP
Los Angeles, CA
Phone: 310-453-6226
Fax: 310-453-6020

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Answer

This situation does not have an easy answer. When it comes to the division of assets during a divorce in California: the devil is in the details. 

To put it simply, if your spouse did not contribute anything to your business while you are married, then the asset is entirely yours after a divorce. However, it is more likely that your spouse contributed community effort into the business, therefore, your case will not be so simple. 

What to expect during the process? 

The team of experts we put together take a three-part approach to your case:

  1. Legal teams and experts will decide which part of your assets are separate and which part is community property. The community property assets are going to be divided with your spouse.

  2. Our experts will work to determine how much these community property assets are worth today.

  3. Together we will determine who legally gets what and see if there is room to negotiate or find other ways to compensate your spouse.

California is a “community property” state. 

If your spouse can prove they contributed to your business during the marriage, then the answer to this question depends on many things. If you created the company before your wedding, then it is known as “separate property.”

However, if your spouse or ex-spouse contributed to your self-employed business in any way, then the company will likely be considered “community.” The judge will likely rule that during the marriage, your spouse put effort into the business, whether directly or by supporting you, and the law governs that both parties in the union are entitled to a share of the interest and profits.

Is my business going to be affected in the divorce?

This answer needs tailored guidance from an attorney to be 100 percent certain. Without knowing the details, it can depend on a couple of factors:

  • What type of business do you have?
  • What type of reasonable compensation is owed to both parties?

Regarding your “type” of business.

Is your business based on a product or a service? For example, if you own a dog food company, you are selling a product. That might be a business that “runs itself,” which means the day-to-day is generally handled by a group of people and the product will be created whether you have hands-on influence or not.

That is much different from a business that depends on hands-on activities or services to make money. An example would be a self-employed or private practice chiropractor. In this case, you would be the business owner performing the service that makes the profit. Other examples can be a lawyer, doctor, architect, landscaper, designer or others.

Regarding “reasonable compensation”

Your best move is to work with a skilled professional team to determine how much compensation you are due for your hard work. My firm assembles a team of experts to do this such as a real estate appraiser, a forensic accountant, vocational expert, a private investigator, a writing analyst, a custody coach or others.

As an example, a forensic accountant will determine their information based on various records of the business such as tax returns, general ledgers, profit statements, inventory, accounts receivable, salaries paid and more. Through research, they determine what reasonable compensation is for the business owner. 

Determining reasonable compensation becomes even more complex if you have a team or other entities that work with you. The big question is: What is the “reasonable compensation” for someone to run the business versus someone who is hands-on every day performing the service? Once that is determined, then we will use that to determine the reasonable compensation for your spouse.

Valuation can make simple cases very intricate. 

Valuation of your business will run from the date of your marriage to determine its value as a separate asset. Then, our teams will consider what the “rate of return” would be if the business stayed at that same value or ran itself. The term “ran itself” looks at if the business just continued with no intervention from you to change or improve its profits. 

Determining what a business is worth today can be complicated. If there is a significant difference between when the company started and its startup costs, versus the profits it makes today, this difference in money can be considered community property if it is attributed to the labor that your spouse put into it.

Capitalization rates are an additional element to the case.

The other factor is a “capitalization rate.” An accountant we hire will figure out a “rate of risk” for your business. Based on this risk, reasonable compensation and normalized net income will look very different. Our experts will figure out what the business is valued and give you an honest outlook on your risk and your normalized net income. This is not something an attorney figures out for you or friends can advise you about. You need a skilled forensic accountant.  

If your business cannot provide the compensation, what does? 

In the case of someone who uses their services to make their income, the business cannot just be sold with the selling costs divided between the two divorcing parties. Some occupations also make it impossible to split or hand the company over to a spouse. If you are a doctor and the other spouse is not a licensed doctor, they could not take over the business. In instances like this, you clearly cannot cut the practice or this type of business in half that causes additional complexities.

This type of business can cause an issue since the compensation you owe your spouse needs to come from another place such as selling the house, splitting the bank account or dividing retirement funds. 

In the end, the division of commercial property process is very complex and requires help from experienced attorneys and a team of experts. We believe in treating clients like people, not like cases. You deserve fair representation for the work you put into your business and the compensation you are owed.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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