Property you owned before the marriage is considered non-marital property. Non-marital property will not be divided upon divorce. However, if your business increased in value during the marriage, it may be considered a marital asset, which would be subject to division. The division of your business depends on both current contracts and sometimes future potential earnings.
According to California law, community property is any asset or income acquired by a married person while living with their spouse. Separate or non-marital property is any asset acquired by a spouse before a marriage, or after the parties separate. Community property is required by law to be divided equally upon divorce, if there is no written agreement specifying a certain division of property. When community property is divided, the joint obligations of the parties are subtracted from the total fair market value of the community assets, which yields the net value of the community property. Each spouse will receive half of the net value of the community estate, unless there is a contract stating otherwise.
A business or professional practice will also be considered in the valuation and division of community property. There is a community property interest that must be considered upon dissolution, in regards to the amount that a business has been developed during the marriage. The hardest part of dividing a business and determining the value of the business is evaluating the “goodwill.” This refers to the value that businesses have based on the expectation of future business earnings, determined by the established name or reputation of the business. If the business is operated by one of the spouses, it will have goodwill value even if it could not be sold on the open market.
Dividing a business can be one of the most difficult assets to divide. A business owner might wonder how there can be any “goodwill,” since if they stopped operating the business the business would not make any money. The goodwill of a business is valued as a “going concern.” This means that the law assumes that the business will continue operating and will not lose any customers that would otherwise have been lost if it were sold to another owner.
Usually, certified public accountants and business appraisers are hired to determine the value of a business or professional practice. The appraiser or accountant who is hired will review the books and records of the business, and prepare a written report determining the estimated value of the business.
Small businesses that are owned jointly by the two spouses can often be divided without conflict. The separating parties can use a buy out agreement, in which one spouse buys out the portion owned by the other spouse. In this situation, one spouse continues owning the business while the other receives financial compensation. Spouses can also go with separation clauses, where various elements of the business are given to each spouse. Sometimes, spouses can remain business partners after divorce, though it is not common since it can lead to more conflict.
