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The Business of Divorce: How a Family Business is Handled in a Divorce

Posted by Ahluwalia Law Professional Corporation | Sep 20, 2020 | 0 Comments

When you fall out of love with your spouse and decide to move forward with a divorce, you are probably wondering how your other labor of love—the small business that you've spent so much time and money on—will be handled during the legal proceedings. Wondering might be a little generous; you are likely worried, stressed, and anxious. This blog will explore some ways that it might be dealt with during the course of your divorce (absent any mutual agreements between you and your spouse). 

Your Business is Either Marital or Separate Property

The division of marital property is one of the biggest considerations during any divorce. Generally, a business is considered property that must be inventoried and divided just like any other marital assets. Marital property is anything that was obtained by either spouse during the course of their marriage (with rare exceptions). California, notably, is a community property state, which means that spouses begin with a 50 percent ownership stake of all marital property at the beginning of their divorce. 

If a business existed before the marriage yet both spouses contributed to its maintenance and growth during the marriage, deciding how much of the business's valuation is separate property (vs. marital property) can be quite complex. In these situations, you might need to hire a forensic accountant. 

However, the first order of business is to get an accurate valuation of the business. This is especially important with closely held private businesses. Commonly, spouses who are already in a contested divorce (in which all divorce-related matters are not agreed upon) will also challenge each other on the actual value of the company. So, getting an accurate valuation from a neutral third party is crucial. 

What if the Courts Must Decide on the Business Division?

If spouses simply cannot agree on how to handle the family business in their divorce, the court must determine the best course of action. Simply giving one spouse half of the revenue from the business usually isn't feasible regarding the survival of the company, so one spouse is often given control of the business in exchange for the other spouse receiving other assets to make up for it. If both spouses have a controlling interest in the business, one spouse might buy out the other's interest. 

Other Arrangements

Sometimes, spouses might agree to operate the business as usual if they believe that company-related matters can be handled amicably after the divorce is final. Other times, the divorcing spouses might agree to simply sell the business and split the proceeds. 

For example, let's consider a divorcing couple who both have 40 percent interests in a local restaurant valued at $1,500,000. One spouse plans on moving across the country as soon as she is able. After going through mediation, the spouse who is staying agrees to buy out the other spouse's interest (valued at $600,000).

Ahluwalia Law Can Help

Handling a family business during a divorce is an extremely complex issue; the outcome is heavily dependent on the structure of the company, the couple's goals regarding the company, and the level of contention between the spouses. Our firm strongly encourages uncontested divorces because the outcome of the divorce is in your hands (and for many other reasons); this is illustrated quite vividly when spouses have a small business to worry about. 

Ahluwalia Law is focused on getting your family law dispute handled as efficiently as possible—with minimal stress. We offer free consultations to prospective clients. Reach out to us by phone at 408-416-3149 to get started.

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