When it comes to divorce and the division of property between ex-spouses, each state has a slightly different set of rules. In California and a handful of other states, the courts follow a system known as community property law. When a couple files for divorce in California, their assets are categorized as either community property or separate property, and each type of property is divided differently.
Community property vs. separate property
Community property in California is defined as the assets acquired or earned by either spouse during the marriage while living in the state. Similarly, property that was obtained during the marriage while living outside of California is referred to as quasi-community property, and is treated in much the same way as community property. Spouses are considered equal owners of all community property, regardless of which spouse purchased or generated the asset. Upon divorce, community property is typically divided equally between the spouses.
Separate property, on the other hand, is property obtained by either spouse prior to marriage or after the divorce process has begun. Unlike community property, separate property is not subject to division during divorce and instead remains with its original owner. Assets acquired individually by a spouse through gift or inheritance can also be considered separated property even if obtained during the marriage.
Protecting business assets during a California divorce
Dividing marital property during divorce can be complicated, even when limited to ordinary assets such as a home, car, savings account or retirement plan. When one or both spouses are business owners, the process of sorting out who gets what can become even more challenging. Therefore, it is important for California business owners to be proactive in taking steps to protect their interests in the event of divorce.
One major issue that can arise when business owners divorce is determining how much the business is worth. This becomes especially difficult when the divorcing spouses' interests are at odds with one another. For instance, if one spouse wishes to buy out the other spouse’s ownership in the business, the buying spouse may argue for a low valuation while the selling spouse prefers a higher valuation. Business owners should work with an independent appraiser to determine the value of the business from an objective point of view.
Problems can also arise when one spouse makes a major change within the business during or immediately prior to the divorce> Doing so may jeopardize his or her control of the business if a judge determines that the change was not in the best interest of the business. Likewise, major business expenditures during the divorce can raise a red flag if they appear to be an attempt to conceal assets from a spouse. As much as possible, major changes and expenditures should be avoided during divorce. If they become necessary, business owners should provide a full disclosure of the change or expenditure along with an explanation of why it was necessary.
Seek legal help
Whenever possible, it is wise for California business owners to take protective measures before the possibility of divorce arises — even prior to marriage, in some cases, or immediately upon forming a new business. To learn more about protecting business assets during divorce in California, speak with an experienced divorce lawyer who can explain the laws that affect your business and work with you to protect your assets during divorce.