Entrepreneurs in California and around the country sometimes have the mistaken belief that their businesses will be somehow exempt from property division should they go through a divorce. While setting up a corporation may protect the personal assets of shareholders should the business be sued, no form of business entity can place commercial interests out of the reach of spouses during divorce proceedings.
California is a community property state, and assets such as real estate, artwork, investments and business interests will be divided equally by a judge if the spouses are not able to come to an agreement on their own. Assets that spouses cannot agree on may be ordered sold, but judges are often reluctant to take this path with a business. Businesses are sources of income, and judges often fear that ordering the sale of a company will leave entrepreneurs unable to fulfill their alimony and child support obligations.
The amount of a company’s value that is subject to division during a divorce will depend in large part on when the business was formed. Businesses that opened their doors after the couple married will be considered marital assets in their entirety, but those that were already up and running when a couple walked down the aisle are treated differently. In these cases, courts will divide the amount by which the company’s value has increased during the marriage.
Savvy entrepreneurs sometimes attempt to limit their exposure during property division negotiations by deliberately allowing their businesses to struggle during the divorce process and then recover after the divorce is final. Experienced family law attorneys may have experienced this kind of tactic, and they will likely scrutinize several years of business records when a business owner is involved in a divorce. Attorneys may also call upon experts, such as auditors and forensic accountants, when the business involved has complex records or financial impropriety is suspected.
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