In California, the state considers businesses created in a marriage as community property. During the asset division process, the non-business owning spouse is legally entitled to half of the business’s value. Business-related divorces can get complicated fast. How spouses choose to treat the business can affect both parties’ tax situations, future spousal support, and general financial statuses.
Considerations for Divorcing a Business Owner
During a divorce, things can get heated. One spouse may feel very defensive of the company and give up too much to protect the business. The other may see the business value as an opportunity to negotiate for an increased payout now. Anger and emotions can cloud best interests for both parties. If you’re in the process of divorcing a business owner, keep these considerations in mind:
- Businesses may need more than half of their total values to survive. If you ask for the full half of the business in a payout, you may take away the business’s operating capabilities. Some businesses cannot survive such a loss, and the request for your half today could jeopardize your spouse’s ability to pay spousal support or child support in the future.When negotiating for your share of the business, consider alternatives to a payout. A stake in the business or increased rights to other community property may make more sense. Try to focus on the assets that really matter to you instead of trying to hurt the other person with your actions.
- Defensive business owners may try to trick you. While some spouses may try to hurt a business owner with property division requests, some business owners act out, too. Do not assume that the other party will fully and willingly disclose all relevant business assets during a divorce.To protect his or her interests, a business owner may use various techniques to keep community property away from a spouse, including lowering income reports and shielding assets in protected accounts. Some of the actions business owners take to protect their self-interests are merely unethical, while others are illegal.
For any business-involved divorce, work with an attorney who understands how businesses affect asset division. Attorneys know the red flags to look for when business owners resort to shielding or hiding assets in a divorce.
- Consider how the divorce will affect your tax situation. Many spouses forget to consider how a divorce will change tax implications during the next tax season. From spousal support to business ownership arrangements, each asset division determination could change the way you pay taxes next season.Understand all the tax consequences of asset divisions before you agree to the terms. Your attorney can help you find the most advantageous long-term solutions based on appreciation/depreciation, tax consequences, and other considerations.
- Business arrangements are often complex. In a basic sole-ownership business started during marriage, your right to half the property may be clear. However, businesses come in all kinds of structures and from all types of arrangements. Divorces involving complex business arrangements often require the assistance of a forensic accountant who can tease out the value of actual community property in the business.In some cases, spouses who are partners must consider how the business will move forward in addition to asset division considerations. Spouses that share a stake in a business may continue to work together after a divorce, sell the business and share the remaining profits, or one spouse may buy out the other. The right legal and financial support during a divorce can help you understand your right to community property and a fair asset separation agreement for your situation.
Business ownership doesn’t have to serve as a point of contention in divorce proceedings. While businesses can complicate divorce proceedings, the goal of divorce is to create a fair split between spouses. If both individuals remain honest and focused on what they really want out of the divorce, both can walk away satisfied.