Your Guide Through Challenging Times

Dividing a family business when both spouses worked for it

On Behalf of | Jan 27, 2021 | Divorce |

Assets such as a shared family-owned business may require a 50-50 division during a divorce. Under California’s community property laws, a company purchased or started during a marriage belongs to both spouses, as noted by Business.com. 

If an individual inherited a business or purchased it before a marriage, the Golden State generally classifies it as his or her own separate property. An exception may exist if the other spouse proves he or she made a significant contribution to a company’s income and growth. 

Providing evidence to prove the worth of a spouse’s input

Some small businesses do not issue regular paychecks to owners who also act as managers or employees. A spouse without weekly paycheck stubs may instead submit tax returns or shareholder certificates to the court to demonstrate an ownership interest. 

If a spouse did not receive money from the business, a judge may consider the monetary value of the services that he or she contributed. For example, a spouse may have provided a particular set of skills that a company relied on. The court may determine the fair market value of those services. 

Paying a spouse for his or her contribution

An individual who wishes to take full ownership of a family-run business may need to buy out a spouse’s share of his or her valued contribution to it. According to the American Bar Association, the transfer of a spouse’s ownership in a company during a divorce may not incur an income tax liability. 

Although California’s laws require an equal division of a business, there are options for one spouse to maintain full ownership. A professional valuation of a couple’s marital assets, for example, may provide the means by which a spouse may buyout or “trade” other property in order to keep a business.