In California, the general rule is that both spouses have equal rights to manage and control community property as if it were their own. However, if one spouse is the primary operator of a business and the other spouse is not actively involved, the operating spouse will retain responsibility for running the business during the divorce in most situations.
This responsibility does not go unchecked. The operating spouse must give prior written notice to the other spouse before selling, leasing, or borrowing against the business' property. In addition, the law requires actual consent from the non-operating spouse before the business is allowed to give away community property or sell it below market value.
How Will the Business Proceeds Be Divided During Divorce?
As a couple, a husband and wife are considered a “community” in community property states such as California. If the funds or labor of the community, i.e. either husband or wife or both, were used to enhance the value of a business, then upon dissolution of the marriage, courts will consider the community’s effort put forth towards the business.
For instance, if there is an increase in the business’s value and this increase is primarily due to the nature of the business, then courts will favor the original owner of the business rather than the community. So, upon dissolution, to estimate how much money your spouse will get, take these points into consideration. Courts in community property states like California will look to the market value of the salary for the position your spouse took on. From this number, courts will subtract any family expenses paid for by the business. The resulting number is what you and your spouse as “the community” will be granted. The remaining amount is what will be awarded to you, solely as the business owner.
However, if the increase in the business’s value is due to the personal skills or efforts of your spouse, then courts will favor the community upon dissolution of the marriage. The value of the spouse’s business at the time of marriage is valued. From this number, about 10% is added as a fair rate of return. This total is what you will be granted as the original business owner. The remainder sum will be awarded to the community and distributed equally upon dissolution.
What If the Business is Only Partially Community Property?
California law says that you have a special responsibility to manage the property in a way that does not prevent your spouse from getting the benefit of it. Therefore, even if your business is only partially community property, you still have a duty to protect your spouse's interest in the business and to tell your spouse about assets, liabilities and transactions that affect his or her interest.
What If Federal Rules Prevent Me from Telling my Spouse About the Business?
California generally requires that you tell your spouse about all of your assets and liabilities, both separate and community - but sometimes, such disclosures are prohibited by Federal Law. If that happens you must at least report that you have information that you are not permitted to disclose.
Should I Contact a Family Attorney for My California Divorce?
Divorce proceedings can be very complicated. An experienced family law attorney can help you determine how a California court will divide your property. A family lawyer can also represent you in court if a dispute arises.