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When you own a business, it’s more than just a source of income – it’s something you’ve built through vision, effort, and sacrifice. Facing a divorce can put all of that at risk, impacting not only your company’s ownership and operations but also your financial stability and personal well-being. In California, the legal and financial issues surrounding business ownership and business division during a divorce can be complex and high-stakes.
At Moradi Neufer, we understand what’s at stake for business owners like you. With significant experience helping clients across California navigate divorce while protecting what matters most, we’re committed to guiding you through every step of the process with clarity, skill, and determination. In this article, we’ll walk through hypothetical examples of how a divorce could affect your business and what you can do to stay ahead of these challenges.
Click here to learn more about how the business division works in California divorce.
Example 1: What if you started a business before your marriage that grew in value during your marriage?
Hypothetical: Alex founded a small marketing consulting company 2 years before marrying Ashley. When they got married, the business was modest and generated minimal income. However, during their 10-year marriage, Alex poured countless hours into expanding the company. Ashley contributed indirectly by supporting the household, caring for their children, and even assisting occasionally with business-related tasks without any formal compensation.
By the time they started divorce proceedings, the business had grown into a thriving enterprise, valued at several million dollars, with a handful of employees.
Classifying the Business
Initially, Alex argues that the business is his separate property under California law because he started it before the marriage. However, Ashley has strong grounds to claim a community property interest in the growth and increased value of the business during the marriage.
- The amount of time, skill, and labor that Alex put into growing the business during the marriage counts as community efforts. Any increase in value based on these efforts can be considered community property to be split 50/50 between spouses.
As a result, Alex’s business is classified as a mixed asset: part separate property (the value at the date of marriage) and part community property (the value gained during the marriage).
Key Legal Steps to Resolve the Dispute
First, Alex and Ashley must value the business at two points in time:
- On the day they were married, to determine what is Alex’s separate property, and
- On the date of their separation, to determine how much growth occurred during the marriage, which would count as community property to be split 50/50.
California courts use formulas to divide the value between separate and community property.
- The Pereira method is used when one or both of the spouses’ personal efforts are a major factor in the growth of the business. This method favors the community. In this case, the court would apply a reasonable rate of return (often around 6%-10% annually) to Alex’s separate property at the time they got married. Then, the remainder of the business’s growth would be community property, to be split equally.
- The Van Camp method is used when the success of a business is largely due to external factors or passive growth. This method favors separate property. The court will calculate the fair market salary that Alex should have earned during the marriage, subtract what he actually received, and consider the remainder as community property. Meanwhile, the rest of the business value will remain Alex’s separate property.
Click here to read more about the business apportionment methods used by California courts.
In some cases, courts might take a hybrid approach to these formulas depending on the specific circumstances of the case.
Potential Final Resolution
To avoid selling or dismantling the business, Alex might buy out Ashley’s share of the community interest. This could involve paying Ashley a lump sum based on the valuation, or trading other marital assets to offset the value – for example, by giving Ashley a larger share of their retirement accounts, cash savings, or real estate.
Regardless of the business split, Ashley may be entitled to spousal support, particularly if they spent years out of the workforce supporting the household while Alex built the company.
Key Takeaways for Business Owners
Even if you start your business before you get married, its growth during your marriage can put a significant portion of it at risk in the case of a divorce. Proactive legal planning – like prenuptial or postnuptial agreements – can help, but once a divorce is underway, working with experienced legal counsel is crucial to protecting your interests.
Example 2: What if you and your spouse launched a business together during your marriage?
Jordan and Casey, a married couple living in San Francisco, launched a SaaS startup together 5 years into their marriage. Jordan brought the technical background while Casey handled business development and client acquisition. Together, they poured their time, energy, and financial resources into growing the company from an idea to a profitable enterprise.
As they begin divorce proceedings, the business that once united them is now a major point of contention. Because the company was launched during the marriage, California law presumes it to be community property. That means Jordan and Casey each likely have a 50/50 ownership interest – regardless of who contributed more capital, who worked longer hours, or whose name appears on the operating agreement. Unless a valid pre- or postnuptial agreement says otherwise, the business and its value must be divided equally.
What Are the Legal Options?
- One Spouse Buys Out the Other – If Casey wants to continue running the company, she might offer to buy out Jordan’s share. That would likely require a professional valuation, a negotiated exchange, and a carefully structured legal agreement to avoid future disputes over liabilities or hidden value. Jordan might get more real estate, retirement funds, or cash in place of business equity. While this path can preserve the business, the financial strain of buying out a 50% stake can be significant.
- Sell the Business and Divide the Proceeds – If neither Jordan nor Casey wants (or can afford) to continue the business solo, they may agree to sell the company and divide the proceeds. This offers a clean break, but it can come with downsides. The sale process may take time, the valuation may fall short of expectations, and third-party investors or customers might lose confidence during the transition. Still, for some divorcing couples, this can be the most emotionally neutral solution.
- Continue to Co-Own the Business – In rare cases, divorcing spouses like Jordan and Casey choose to continue running the business together, at least temporarily. Doing so requires strong personal boundaries, clear legal agreements about ownership, roles, and conflict resolution, and a high degree of trust despite the end of their personal relationship. This path can work when the business is deeply tied to the careers of both spouses, difficult to sell, or extremely profitable, but it carries obvious emotional risks.
What Are the Complicating Factors?
Jordan and Casey may face the following challenges:
- Valuation Disputes – One spouse may believe that the business is worth more (or less) than the other, especially if they have different expectations for growth.
- Third-Party Interests – Jordan and Casey’s marital estate only includes the amount of their ownership interest in the business. They may have to consider the terms of any third-party partnership agreements or right of first refusal clauses.
- Debt and Liability Allocation – Business loans, vendor contracts, and investor obligations must be factored into the decision, not just the company’s value on paper.
These financial and legal complexities often require business-savvy legal counsel and potentially other experts, such as forensic accountant, to ensure a satisfactory outcome.
The Bottom Line
For couples like Jordan and Casey, who built something together professionally and personally, untangling a business in divorce can be one of the most emotionally and financially difficult aspects of the process. Whether the best path is a buyout, sale, or continued co-ownership, approaching it with a clear legal strategy, an accurate valuation, and a focus on long-term financial health is key to reaching a lasting resolution.
Example 3: What if you operate a sole proprietorship that uses business profits to pay for family living expenses?
Jamie has operated a successful graphic design business as a sole proprietor since before marrying Morgan. The business was modest at first, but grew steadily over the course of their 7-year marriage. Now, as Jamie and Morgan move through divorce, the question arises: Is the business Jamie’s separate property, or does Morgan have a legal claim to it too?
Community Property Claims on Business Income
Even if Jamie started the business before the marriage, California generally treats income earned during the marriage (from the skills and efforts of the spouse who owns the business) as community property to be split 50/50. In addition, if profits were regularly deposited into joint accounts or used to pay family bills without documentation, it becomes extremely difficult to “trace” potential “separate” portions of the income.
Valuation and “Dividing” the Business
Unlike a partnership or corporation, a sole proprietorship like Jamie’s cannot be split between two people to continue operating the business. It’s legally tied to Jamie as the owner.
To resolve this, courts will order a professional valuation to determine the current worth of the business and identify what parts are community property, if any. Similar to example 1 above, Jamie can still claim the fair market value of the business at the time they got married as “separate” property that belongs 100% to her. Once a professional valuation has been completed, Jamie will then be required to buy out Morgan’s community “share” of the business, often by exchanging other marital assets or through a structured settlement. The process may also involve considerations around spousal support and must factor in any business debts or liabilities tied to the company.
Click here to read more about how California handles business ownership in divorce.
Whether you built your company before marriage, launched it together with your spouse, or have a sole proprietorship, the financial and legal implications can be significant and deeply personal. Property classification, business valuation, income tracing, and buyout negotiations are not just technical matters – they can shape your future livelihood and stability.
At Moradi Neufer, we understand what’s at risk for business owners going through divorce in California. Our team has the knowledge, insight, and determination to help you navigate these complexities with confidence. With careful strategy and a clear understanding of your goals, we work to protect what you’ve built and guide you toward a forward-looking resolution. If you’re facing divorce and want to safeguard your business, your income, and your peace of mind, we’re here to help you take the next step. Contact us now to get started.
