California is a community property state, which means that joint assets get divided 50/50 in a divorce settlement. In many cases, joint debts are also divided equally between yourself and your spouse. Depending on the specific facts in a divorce proceeding, courts may consider a business to be a joint asset.
Your spouse might obtain an ownership stake in your company
If your spouse obtains an ownership interest in your business, it may mean that you lose your title as the majority shareholder. Therefore, you might lose your ability to make decisions that impact the company’s employees, investors and customers. Over time, an inability to function as the organization’s unquestioned leader could lead to the company’s demise.
The company might need to be sold
Unless your spouse is a doctor or lawyer, he or she won’t be able to have an ownership stake in a medical or legal practice. In some cases, your spouse may want to receive cash in lieu of actually becoming a partial owner of your company. If you don’t have sufficient liquidity to make that payment, it may be necessary to sell the company and use the proceeds to meet your legal obligation.
How to shield your business from a divorce
It may be possible to shield your company from the negative consequences of divorce by placing it into a trust. Alternatively, you could choose to create a prenuptial agreement that defines the company as separate property. If you founded the business during the marriage, a postnuptial agreement can stipulate that it remains a separate asset. Finally, a family law attorney may be able to help negotiate a deal that allows you to retain ownership of the organization in exchange for other assets, such as a joint bank or brokerage account.
If you are ending your marriage, it may be best to do so with the assistance of legal counsel. An attorney may be able to review a prenuptial agreement or take other steps to help you obtain a favorable settlement.
