The Effect of Divorce on Your Business

     In California, the name on the business or real property is ONLY the beginning of the inquiry.  The results are often unexpected and sometimes devastating.  Having good legal advice is smart if you want to protect your business or in obtaining your fair share - even if the business is held in the name of only one spouse, and even if the business was started prior to the marriage.  The discussion here barely scratches the surface of the legal and financial issues that can arise with regard to your business interests in a divorce.

If the EVIDENCE shows that the business was acquired or established with community property during marriage, then the spouse's ENTIRE interest is presumed to be community.

A spouse who claims a separate property interest in a business or practice must PROVE that it was acquired or commenced before marriage or from a separate property source during marriage.  If the court finds that the business was separate property, it must STILL determine to what extent any of the interest, and any increase in value and profits, should be apportioned to the community estate.

The general rule for dividing community property, including a business, is to order an IN-KIND DIVISION, subject to several exceptions. 

If the business is a community property business, the court HAS THE DISCRETION to award the business to only one spouse, if economic circumstances so warrant.  In determining the division of community property, a court has discretion under Family Code, section 2601 to make an award as follows:

Where economic circumstances warrant, the court may award an asset of the community estate to one party ON SUCH CONDITIONS AS THE COURT DEEMS PROPER To effect a substantially equal division of the community estate.

If a community property asset is awarded to one spouse, the court must award property, or an amount, COMPARABLE IN VALUE to the other spouse to make the division substantially equal.  In order to do so, the court must first value the business before dividing the community property.

Preparation Protects your Assets


     The more information you have about your business, the more we can assist you.  We will need to know the answers to questions such as these (and a lot more):

  • Briefly describe your job for the business.
  • What products or services does the business provide?
  • What is the net profit at this time?
  • Are you the sole owner?
  • What percentage interest do you own?
  • Who owns the rest, and what are their interests?
  • What is the organizational structure of the business?
  • How do the various components of that structure interrelate with the others?
  • Are there portions that could be sold without dissolving the rest?
  • Are there assets of the business that could be sold without dissolving the entire business?
  • Describe any transfer restrictions that exist with respect to ownership interests in the business.
  • Are you subject to those transfer restrictions?
  • If you sell part of the business, can it continue to operate?

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Right to Reimbursement of Separate Property Used towards the Purchase of Community Property or towards the Purchase of the Separate Property of the Other Spouse.

     In the division of the community estate, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party MUST be reimbursed for the party's contributions to the acquisition of the property to the extent the party TRACES THE CONTRIBUTIONS to a separate property source.

      The amount reimbursed will be without interest or adjustment for change in monetary values and MAY NOT EXCEED THE NET VALUE of the property at the time of the division (i.e., at the time of trial).

      Contributions to the acquisition of the property include down payments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but DO NOT INCLUDE payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property. Family Code, section 2640.



For the search engines: Many of our divorce and legal separation clients seeking lawyers with experience in family law, divorce, child custody, child support, spousal support, alimony, community property, separate property, real property division, the division of businesses, and restraining orders are drawn from Pasadena, Arcadia, Monrovia, Temple City, Bradbury, Sierra Madre, Duarte, and San Marino, while others live in Azusa, San Gabriel, Alhambra, Glendora, Baldwin Park, Covina, and West Covina. We also attract clients from throughout the Greater Los Angeles area and the Inland Empire.


 

 

  Did you know?

Transmutation: changing the character of property from separate to community, or from community to separate.

While the general rule is that transmutations must be in writing, the way the rules operate for some businesses the law essentially works a transmutation from separate to community property just from the normal operation of the business during the marriage.


   

 

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Attorney Mark Warfel