How to Protect Your Business Assets During Divorce
Jan. 9, 2025
Divorce can be a complicated and stressful process, especially when there are business assets involved. If you own a business, protecting it during divorce is essential to safeguard your financial future.
At Kenneth H.J. Henjum Law Office, located in Ventura, California, our experienced divorce attorneys understand that business assets can be a major point of contention, as they may be considered marital property depending on when and how they were acquired.
To protect your business interests during a divorce, it’s important to understand the divorce requirements in California and take proactive steps throughout the process.
How Divorce Affects Business Assets
In California, generally, any business acquired during the marriage may be considered marital property and subject to division. This means that your spouse could have a claim to a portion of the business’s value.
However, businesses established before the marriage or inherited by one spouse may be considered separate property, depending on how they were handled during the marriage.
Importance of Prenuptial or Postnuptial Agreements
One of the most effective ways to protect your business during divorce is by creating a prenuptial or postnuptial agreement. These legal documents allow you to outline the ownership and division of business assets in the event of a divorce.
A prenuptial agreement is signed before marriage, while a postnuptial agreement is signed after the marriage has already taken place. Some benefits of these agreements include:
Clear division of assets: These agreements can specifically define which assets are considered separate property and which are marital property, including the business.
Protection from future claims: With a prenuptial or postnuptial agreement, you can limit the financial interest your spouse may have in your business, reducing the risk of it being divided during the divorce.
Customization: Prenuptial and postnuptial agreements can be tailored to your specific situation, allowing you to set terms that protect your business interests.
Creating a prenup or postnup agreement can provide clarity and prevent lengthy negotiations and disputes down the line. In the absence of an agreement, the court will apply its standard division rules.
Why You Should Get a Business Valuation
When divorce proceedings begin, one of the first steps in protecting your business is getting a professional business valuation. The court will need to understand the worth of the business to determine its potential impact on property division.
A professional valuation can help make sure that your business is accurately assessed and prevent it from being overvalued, which could lead to an unfair division of assets.
A business valuation will take into account various factors such as the company’s financial health, income, assets, liabilities, and the role each spouse played in building the business. This can be a crucial step in determining the amount of equity that should be divided and in protecting the business from an excessive claim by your spouse.
Once the valuation is complete, you’ll have a clearer understanding of the business’s worth and how it should be handled during the divorce.
Keep Business and Personal Finances Separate
Mixing personal and business finances can lead to complications and potentially make your business more vulnerable in the event of a divorce. By maintaining clear boundaries between business and personal funds, you can more easily prove that the business is a separate asset. Some key factors to keep in mind include:
Separate accounts: Make sure that your business operates with its own bank accounts and credit lines, distinct from your personal accounts.
Proper documentation: Keep thorough records of business expenses and income, and make sure that personal expenses aren’t being paid through business funds.
Avoid joint ownership: If your spouse isn’t involved in the business, avoid adding them as a co-owner or signing personal guarantees for business debts.
By keeping these financial boundaries clear, you can reduce the risk of your business being considered a joint asset during the divorce. Additionally, you can also structure your business ownership to better protect your assets during a divorce.
The Importance of Your Business Structure
The way your business is structured can have a significant impact on how its assets are treated in a divorce. If you’re a sole proprietor or have a partnership with your spouse, the business could be considered marital property and subject to division.
In contrast, if your business is incorporated, it may be easier to protect your ownership interests, as the business can be considered a separate legal entity. Some common business structures include:
Sole proprietorships: If you’re operating as a sole proprietor, your spouse may be entitled to a portion of the business in a divorce, as it’s typically treated as marital property.
Limited liability company (LLC): Converting to an LLC can help separate personal and business assets and reduce the risk of your spouse having a claim to the business.
Corporations: If your business is a corporation, the assets are owned by the company itself, which can make it harder for your spouse to claim a share.
Changing your business structure can be a valuable tool for protecting your assets, but it should be done before divorce proceedings begin to confirm its effectiveness.
Your Spouse’s Role in the Business
If your spouse has played an active role in the business, this can complicate the division of assets during divorce. In California, the court may consider your spouse’s contributions when determining the value of the business and their entitlement to a share of it.
This is especially true if your spouse has helped with day-to-day operations or has contributed financially to the business. Some key factors to keep in mind include:
Active participation: If your spouse has been involved in the business, they may be entitled to a portion of its value, regardless of when it was established.
Non-financial contributions: Even if your spouse hasn’t worked directly in the business, their contributions as a homemaker or caretaker may also be considered in the division of assets.
Fair compensation: If your spouse is entitled to a share of the business, consider offering them other assets or compensation to maintain control of your business.
The court will carefully consider the role your spouse has played in the business when determining their share. Now, let’s explore how you can protect your business through the use of a trust.
How Can Trusts Protect Business Assets?
A trust can be an effective tool for protecting your business assets during a divorce. Placing your business in a trust can help you separate it from your personal assets and protect it from division during a divorce. A trust also allows you to control the business’s management and ownership while making sure that it remains separate from your personal property. Some common types of trusts you can consider using include:
Revocable trusts: A revocable trust allows you to retain control over the business and make changes as needed, but it can still provide protection during divorce.
Irrevocable trusts: An irrevocable trust is more permanent and can provide a higher level of protection, but you lose some control over the assets once they’re transferred.
Beneficiary designations: You can designate a beneficiary for the business in the trust, making sure that your spouse doesn’t have a claim to it.
Using a trust can be an effective way to shield your business from division during divorce, but it’s essential to consult with an attorney to make sure that it’s set up correctly.
How to Negotiate a Fair Divorce Settlement
When it comes to protecting your business during divorce, negotiation plays a key role. Working with an experienced divorce attorney can help you negotiate a settlement that preserves your business assets while securing a fair division of property.
Your attorney can help you determine the value of your business and crafting a settlement that minimizes the impact on your business interests.
Negotiation can also involve offering your spouse other assets in exchange for full control of the business. By addressing potential concerns early in the negotiation process, you can help prevent disputes over your business assets.
Protect Your Business Assets With Legal Help
At our firm, we’re dedicated to helping business owners manage the intricacies of divorce and safeguard their interests. We serve clients in California, including Oxnard, Thousand Oaks, Camarillo, and Simi Valley. If you're concerned about protecting your business, contact us today at Kenneth H.J. Henjum Law Office to schedule a consultation.