Is My Wife Really Entitled to Half My Business If We Divorce?
"Half" is a scary word to a self employed spouse
Is My Wife Entitled to Half My Business if We Divorce?
Is my wife entitled to half my business if we divorce? Here is the truth.
If you're asking the question, you're stressed about the answer. Let's get you on the right path.
The word "half" in divorce is pretty scary for most men - half the property, half my income, none of it may make sense to you.
How will the business survive if you have to pay half of its value to your wife?
For business owners like you, the question of whether your wife may be entitled to half of your business makes no sense. Men think about how the business can survive with half of its value going the other way and how they can even afford to pay such a price to their wife?
Usually as all of this worry takes over, some men start thinking about how to cook the books or do other foolish things to make the business look less profitable or less valuable.
When thinking about your business and whether your wife is entitled to half, nothing at all or something in between, you have to get intensely logical and leave the emotions at the door.
You cannot figure out division of an asset like a business on your own
Before you do anything foolish, take a step back and realize you may be over your head. That is where retaining an experienced divorce lawyer and a forensic accountant comes in handy.
Fortunately, the better family law firms (like ours) work with forensic accountants so you won't have to scramble to find one.
Step one is learning how California law treats a business in a divorce
This article will give insight and knowledge into this subject in California. This article is not legal advice about your California divorce.
Your business is unique and you understand it forward and backward right? Until you hire an experienced divorce lawyer who deals with such issues and knows your specific situation well, he or she cannot give proper legal advice.
What we write here about a business applies to male or female business owners and operators
Also, although we have written this article for men, everything we have written here applies equally to women business owners. In fact, women owned business are on the rise (as they should be) although they are still not as predominant as businesses owned by men.
Want to chat? Have a family law in Southern California? Contact our family law firm and we will be happy to talk about your specific situation.
Now, let's get to the question at hand. Ready?
A business is an asset and an asset needs to be characterized and valued
Many factors besides your marriage go into characterization and valuation of a business. Characterization asks what a business is - community property, separate property or a combination?
Valuation asks what the business is worth - the community, separate or combined portion. When evaluating what your wife is entitled to from your business, characterization and valuation play a big part.
Is my wife entitled to half my business if we divorce when my business predates the marriage?
If your business predates the marriage, it will likely have a separate property part to it. What that separate property part is depends on several factors. A few are:
- How long before the marriage the business started?
- What the assets and profitability of the business was before the marriage? For a lot of businesses, profitability may depend in large part on the business' cash flow.
- What the value of the business was at the time of marriage?
- Whether or not the business has become more valuable, less valuable or has the same value as it did at the time of marriage?
- How much of the value change, if any, resulted from the community efforts (your time and/or money invested into it during the marriage and from community sources) versus, as one example, market conditions?
These are just some of the factors that go into determining a separate versus community part of a business that predates the marriage.
Can my wife get half my business in a divorce when the business has been passed down to me by my family?
Whether or not the business predates the marriage, some are passed down from family. For example, a successful auto repair business may be family owned, started by your father, and once he retires, he wants to pass it on to you. Once he does so, you put in time and/or money into the business during the marriage.
What happens with characterization and valuation?
First, we need to show the business was a gift to you or otherwise a transaction that doesn't create a community interest. Then, we look at what your ownership interest in the business is. Is the entire business being passed on to you or is it being split between you and other family members? Or is your father or parents maintaining an ownership interest?
These are just some of the important questions. From there, we look into what the community time and money invested into business may be and figure out if the community has any interest in the business. The use of a forensic accountant is critical in all this.
Does my wife get half my business in a divorce when I have a business partner?
Regardless of when the business started or how you acquired it, if you have a business partner or partners, fellow shareholders or members (for LLCs) that have an equity or ownership interest, the characterization or valuation process becomes more complicated. Will your co-owner get entrenched into your divorce? Maybe, if his or her ownership interest, role or other involvement affects characterization or valuation.
But this shouldn't cause too much concern. With an experienced lawyer and forensic accountant and a proper paper trail to show his or her interest is legitimate, this process doesn't have to be overly complex. Unless your co-owner really does not have an interest in the business and the whole thing is a rouse, you can relax because his or her interest can be carved out and separated from yours and the community portion, if any.
Is my wife entitled to half my business if we divorce when my business was started with separate property funds?
Even if your business started during the marriage, that doesn't mean you should assume the business is community property. There are many things, a few of which we have discussed, that could make a business separate property, in whole or in part. Another is separate property funds.
It's common for a business to get off the ground with start-up money. That money may be gift from family to you, money you had before the marriage or money you invested from a separate property source. That investment may create a separate property interest in the business, which is yours and not that of the community.
From there, a similar analysis is done as we have laid out earlier. Did the community also put in time or money into the business? What is that and what value did it bring to the business? What impact did it have on the business' profitability or valuation? These are the questions your attorney and forensic accountant will work with you to answer.
Beware of double dipping when dividing a business in a divorce
Is your wife asking for support? Are you paying it or will pay it? Where does that spousal support come from? Your business right? So your wife wants half of the business' value and part of its profits for spousal support? So your wife wants more than 50% then?
Double dipping can be unfair and under some circumstances there is an adjustment that should be made when a spouse is paying spousal support from a business' profits and being asked to divide the community property part of the business.
Whether there is an adjustment and how much depends on the facts of the case.
Learn more about spousal support by reading our terrific guide on California spousal support laws.
What have you learned about the issue of whether your wife is entitled to half your business if you divorce?
We have just scratched the surface of this issue. There is so much more that goes into it. What I hope you have learned though is that asking the question of whether your wife is entitled to "half" is the wrong question.
Characterization and valuation are at the heart of dividing a business. But the type of business, industry, revenue, gross versus net profit, the community versus separate property contributions and portions, the role of goodwill and the future economic forecasts and more all may play a factor into how much of the business is community versus separate property and how much you may have to pay to your wife.
We hope this article gave you some insight into this sometimes complex issue. When you are ready for legal advice about your specific situation, contact us for a case strategy session. We are ready to help.