When a married couple decides to divorce in California, one of the most significant issues they will face is dividing their assets and debts. If the couple owns a business together, this can be particularly complicated whether it is operated by only one spouse or both spouses jointly. In this article, we will discuss how property division works in a California divorce when a business is involved.
California is a community property state, which means that property acquired during the marriage is generally considered community property and must be divided equally between the spouses upon divorce. This includes businesses and business assets. However, the division of a business in a divorce can be complex, especially if the business was started before the marriage or if only one spouse was involved in its creation or operation.
One option for dividing a business in a divorce is for one spouse to buy out the other's share of the business. This can be done through negotiation or mediation, or it may require a court order through trial. If the spouses cannot agree on a buyout price, the court may order a valuation of the business to determine its worth. Typically, this is done by having a forensic CPA perform a business valuation. If the parties are in agreement on who they want to use as an expert, the parties can stipulate that a certain forensic CPA be appointed as the court’s expert to value the business pursuant to evidence code section 730. If the parties are not in agreement with the appointment of a 730 expert or if one of the parties are not in agreement with the valuation of the 730 expert, each party can retain their own forensic CPA to value the business. Typically, the court will order that each party’s forensic CPA meet and confer and do a side-by-side evaluation of their calculation to isolate where they differ. This is typically done in preparation for trial.
Another option is for the spouses to continue to co-own the business after the divorce. This is rare, but it can work if the spouses are willing to continue working together and can establish a clear plan for managing the business. However, this option is usually not recommended, as it can lead to ongoing conflict and legal disputes.
If the business was started before the marriage or if only one spouse was involved in its creation or operation, the court may consider these factors when determining how to divide the business. For example, if one spouse started the business before the marriage and the other spouse made no significant contributions to the business, the court may consider the business to be the separate property of the spouse who started it. However, if the other spouse contributed significantly to the business during the marriage or if the business has grown significantly during the marriage due to the hard work of the owner spouse during the marriage, the court may still award them a portion of the business or its profits. In order to determine what percentage of a business is community property versus separate property, there are two methods used based on two cases, Van Camp v. Van Camp, (1921) 53 Cal.App. 17 and Pereira v. Pereira, (1909) 156 Cal. 1, 103. These formulas are used to determine the value attributed to the community and separate property interests.
The Pereira case involves a married couple who ran a profitable business. Although the husband claimed that he had started the business before the marriage with separate capital, the Court found that a share of the earnings was community property. The Court, however, emphasized that the success of the business was largely due to the husband, who ran the company. The Pereira method of analysis is typically applied when business profits are mainly attributed to the efforts of the “community.” The concept of a Pereira analysis is to allocate a fair return to the separate property investment in the business and principally apportion the remainder of the value to the community property. As a result, the Pereira analysis is usually applied to small businesses where the efforts of the owner are significant in the success of the business, and it is assumed that the business would not have had such success without the business owner’s efforts.
The Van Camp case resulted from a successful family business. The son of the business owners ran a successful packaging company in California. When the son married, the son’s wife ultimately relied on the holding of the Pereira case and argued that the community interest in the business was due to its successful management. The Court, however, found that the success of the business was also due to the investment of capital into the corporation. As a result, the business increased in value due to the initial investment and various assets rather than the son’s efforts during the marriage. The Van Camp method is used when the increase in the value of a business is primarily the result of the unique nature of the particular asset, and not necessarily the community's efforts. The goal of a Van Camp analysis is to obtain the reasonable value of the community’s services and then allocate that amount to the community property and the remainder to the separate property.
In some cases, the court may order the sale of the business and the division of the proceeds between the spouses. This is usually only done if the spouses cannot agree on any other division method or if the business is not profitable.
In conclusion, dividing a business in a California divorce can be complex and requires careful consideration of all factors involved. It is essential to work with an experienced divorce attorney who can help you navigate the legal process and protect your interests. By working together with your spouse and your attorney, you can find a fair and equitable solution for dividing your business and other assets in your divorce.
Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does create any attorney-client relationship between you and the Law Offices of Kenneth U. Reyes, APC. This article is not a solicitation.
Attorney Kenneth Ursua Reyes was President of the Philippine-American Bar Association. He is a member of both the Family Law section and Immigration Law section of the Los Angeles County Bar Association. He is a graduate of Southwestern University Law School in Los Angeles and California State University, San Bernardino School of Business Administration. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, APC is located at 3699 Wilshire Blvd., Suite 747, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail kenneth@kenreyeslaw.com. Visit us at kenreyeslaw.com