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Small Businesses and Professional Practices FAQ, Part 1

by | May 11, 2020 | FAMILY BUSINESS, Firm News |

One of the most frequently litigated issues in dissolution of marriage cases is what to do with a family business or professional practice. Whether it is a retail establishment, a law practice, or a medical office, any business that has been operated by one of the spouses during the marriage has to be characterized, valued and divided, either through an agreement between the spouses or by the Court.

This is Part 1 of frequently asked questions  regarding closely held businesses and professional practices.

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I was the one who ran the business during the marriage. Why should I have to share it with my spouse?

The California family code defines community property as any earnings or accumulations acquired by a spouse between the date of marriage and the date of separation, except if it is acquired by gift, devise or bequest. This definition is based on two legal assumptions:

● The labors of a spouse during the marriage should benefit the community.

● Each spouse contributes equally to the community, in his or her own way.

In many families, one spouse runs the business, while the other spouse manages the household and focuses on the children. In the eyes of the law, the spouse who is caring for the children is giving the other spouse the time to focus on the business.

If I were to close the business and go work for someone else, the business will no longer exist. If that is the true, why should I have to pay my spouse anything for her share of the business?

When a closely held business or professional practice is one of the community property assets, its value is based on the assumption that it will be a “going concern;” in other words, that it will continue to exist. It is analogous to what would happen if you had a business partner who decided that she no longer wanted to have anything to do with the business. That partner would expect to be paid for her share of the business. In the eyes of the law, your spouse has the same rights as that hypothetical partner would have.

I had my business up and running well before I got married. Do I get anything for what my business was worth when we got married?

Initially, it is important for you to understand that an asset can be both community property and the separate property of one of the spouses. This commonly happens, for example, where one of the spouses had a premarital savings account into which monies were deposited during the marriage. Because of those marital deposits, the balance in the account when the parties get divorced has to be allocated between the spouse’s separate property and the community property.

The same concept applies to a business that was owned by one of the spouses on the date of marriage. If that business increases in value, a determination has to be made of what caused that increase. The extent to which the appreciation of a business’ value during the marriage is community or the operating spouse’s separate property largely depends upon the nature of the business. If the business is labor-intensive, such as a professional practice or a retail establishment, the services rendered by the spouse during the marriage will result in any increase being primarily attributed to the community.

On the other hand, if the business is not labor-intensive, such as an investment company or real estate holding company, the appreciation would usually be viewed as the result of market factors, not the efforts of the operating spouse. This would mean that any appreciation would primarily benefit the separate property of the operating spouse.