Steps to Protect Your Business During a Divorce

Divorce happens. According to the American Psychological Association (APA), “about 40 to 50 percent of married couples in the United States divorce.” While getting divorced presents challenges for everyone, if you are an entrepreneur or a small business owner, our Irvine divorce attorney notes that there are some special considerations you need to keep in mind.

Be Sure to Protect Your Business

Most of these considerations have to do with the distribution of your marital assets. In California, spouses’ marital assets (those acquired by one or both spouses during the marriage) are generally considered to be “community property,” and this means that they are subject to equitable distribution in the event of a divorce. While equitable does not necessarily mean equal, California law presumes that a 50/50 split will be “just and right” for most couples.

So, what do entrepreneurs and small business owners need to be concerned about when it comes to the division of community property in a divorce? Our Irvine divorce attorney will be glad to review your specific situation, but here are just a few things that should be thought about during this time.

• Corporations, Partnerships and LLCs – If you formed a corporation, partnership, or limited liability company (LLC) during your marriage, your ownership interest in the business is likely to qualify as community property. If you started your business before you got married, then the growth subsequent to your marriage could be at issue in your divorce as well. This is true even if your spouse’s name is not on the paperwork, and even if your company’s governing documents prohibit the unauthorized sale or transfer of shares.
• Personal Assets Used for Business Purposes – Many times, small business owners will use their personal assets for business purposes. Maybe they have not formed a corporation, partnership or LLC; or, perhaps they have not been careful about segregating business and personal expenditures. Whatever the case may be, in addition to dividing your company, you may also have to divide any personal assets that you use for business purposes.
• Financial Accounts – Similarly, many entrepreneurs and small business owners will commingle their personal and business funds. If you deposit revenue from your business into a personal (joint or individual) checking or savings account, then these funds will be subject to distribution separately from your ownership interest in the business. Funds deposited in a business account will generally remain company property, and your spouse’s ability to access these funds (if any) will be determined by the business ownership rights he or she acquires (if any) during your divorce.
• Intellectual Property Rights – Did you come up with your business’s name and logo? Did you design proprietary software, come up with innovative recipes, or develop a patentable invention? While these intangible assets may be owned by the business (if you formed a legal entity), it is also possible that they are community assets that will be individually subject to equitable distribution.
• Ownership vs. Control – When it comes to corporations, partnerships and LLCs, ownership is not necessarily synonymous with control. Would giving up a share of the business also means giving up some amount of control? If so, is this something that you are willing to consider as part of your divorce?

Let Our Irvine Divorce Attorney Help You Protect Your Business

As you can see, these issues can get complicated quickly, and they represent just a small fraction of the issues that will need to be resolved during the divorce process. If you have questions and would like to speak with an Irvine divorce attorney, you can contact our office today for a free and confidential consultation. Call 949-474-0800 or inquire online now.

Frequently Asked Questions

What should a business owner do first when a divorce becomes likely?

Get the financial record in order, because that record is what the case will be decided on. That means several years of business tax returns with all schedules, the general ledger and financial statements, formation and governing documents including any buy-sell agreement, records of owner compensation and distributions, and documentation of any separate-property funds contributed to the company. Doing this before a filing matters, because the automatic restraining orders take effect once a petition is served and cooperation generally declines from that point.

Can an owner restructure the company or move assets beforehand?

No, and attempting it is among the more expensive mistakes available. Spouses owe each other a fiduciary duty in the management of community property, and the disclosure obligation reaches transfers made in anticipation of a divorce. After filing, the automatic restraining orders prohibit transferring, encumbering, concealing, or disposing of property outside the ordinary course of business. A transfer made to reduce a spouse’s share is discoverable through ordinary financial reconstruction, reversible, and grounds for fee awards and sanctions.

Does a premarital or postnuptial agreement protect the business?

It can, substantially, if it was properly executed and if the parties actually lived by it. An agreement characterizing the business as separate property is the single most effective protection available, but its enforceability depends on the statutory formalities, independent counsel, the seven-day presentment period, and adequate disclosure. Equally important is what happened afterward: an agreement is undermined where community funds were poured into the company or where personal and business finances were run together for years.

What protects the business day to day, before any dispute exists?

Ordinary discipline that also happens to be good practice. Keep company and household finances genuinely separate rather than running personal expenses through the entity. Pay the owner a defensible market salary rather than taking everything as distributions. Maintain complete corporate records and minutes. Put a buy-sell agreement in place and actually apply it to real transactions among the owners. Each of these strengthens the owner’s position in a valuation dispute, and each is far more persuasive when it predates the divorce by years.