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What makes divorces involving businesses so hard?

On Behalf of | Jul 3, 2023 | Divorce

Many people who live in Orange County have made their living by building up and running small to mid-sized businesses.

Often, these businesses are family-owned and may have been in a person’s family for generations. Income from successful family businesses frequently allows their leaders to live comfortably.

It is not a surprise then that when someone who owns all or part of a family business faces a divorce, they may have a lot of questions about what will happen to do their business into which they and their families have invested a lot of time and effort.

They may also wonder about financial consequences. Divorce means they could lose part of their ownership in their business and with it, considerable income.

In short, divorces involving family businesses are hard because people have a lot to lose. The stakes are high.

Divorcing business owners have important topics to consider

Each California business owner’s situation is going to be a bit different. Someone who is a business owner and going through a divorce will need to understand how California’s laws will apply to their unique situation.

Still, here are some good questions business owners might ask:

  • Is the business itself subject to division? California’s community property laws are broad. Generally speaking, property will be split 50-50. However, if one spouse owned the business prior to the marriage or acquired it by gift or inheritance, it is possible that all or some of the spouse’s ownership is not subject to division.
  • Is there a premarital agreement? Frequently, business owners require a new co-owner, even if they are a family member, to have a signed premarital agreement. If there is a valid prenup, the terms of that agreement will determine how the court will divide the business.
  • How much is my share in the business worth? Even if there are no plans to sell it, a couple will have to know with some certainty how much the business is worth in order to divide an ownership interest equally.
  • What are the tax consequences? Generally speaking, property exchanges with an ex-spouse during a divorce are not subject to federal tax. However, a later sale of a business is subject to capital gains tax. Other tax consequences may also apply.
  • Can I afford to keep my business? Sometimes, it may work out for an ex-spouse to stay involved, or become more involved, in a family business even after a divorce. If not, though, the business owner will have to find some way to make sure their spouse receives their share of the value of the business. This may involve trading other property or even taking out a loan.
  • How will this change in my life affect my income? If a person will continue to operate a family business after divorce, their income from the business will be figured into child support calculations and may play a role in any alimony payments they may have to make.
  • What about reputational concerns? Many family businesses thrive or die based on the professional reputation of their owners. A messy and public divorce could hurt a business owner’s future.