protect business assets in a divorce

Are you worried about how to protect business assets in a divorce? Confronting the possibility of divorce while protecting your hard-earned assets can be stressful and confusing, but know that you are not alone. At Silva & Associates, we excel in providing expert legal guidance to help you through these challenges and ensure your business interests are protected. We specialize in pre-divorce and marital planning services in Alameda, offering expert guidance tailored to your unique situation. 

With this blog, we aim to arm you with knowledge and strategies to ensure your business assets remain secure in the event of a divorce and to provide you with insights into the legal process of dividing a business in a divorce.

Businesses started between married individuals are generally considered community property. If a divorce occurs, there are several ways to handle the division. One option is for one spouse to buy out the other’s share. Alternatively, both ex-spouses might continue co-owning the business or decide to sell it and split the proceeds. Situations can get complex when only one spouse is actively involved in the business or if the business was started before the marriage but grew in value during the marriage. In these cases of complex divorces, the division relies heavily on the business’s valuation, which can be a point of contention between the parties involved​​​​​​​.

Two landmark cases, Pereira and Van Camp, provide legal frameworks for evaluating and dividing such business assets in divorce proceedings. These cases offer formulas to calculate the division, considering the business’s growth over time and spouses’ contributions. These formulas help ensure a fair distribution of assets by distinguishing between the business’s community property value and any separate property contributions.

The division of business assets in a divorce under California law requires careful consideration of several factors, including the nature of the assets, the contributions of both spouses and the timing of the business’s formation and growth. The Silva & Associates firm provides professional legal guidance, which is invaluable in these situations, ensuring compliance with local regulations and a fair outcome for both parties.

3 Strategies for Protecting Business Assets Before Marriage

 

Planning ahead can significantly protect your business in the event of a divorce. One of the most effective strategies is to draft a prenuptial agreement. This legal document can designate your business as separate property, shielding it from division in a potential divorce. You will want to ensure this agreement is well-drafted to cover all bases, including terms for the possibility of a buyout or how the business will be handled post-divorce​.

Beyond prenups, establishing a trust for your business can offer another layer of protection. This move designates the business as separate from your marital assets, potentially shielding it in divorce proceedings. However, this must be done before marriage to avoid potential complications​.

Maintaining a clear separation between your business and personal finances is another practical step. This includes paying yourself a fair salary from the company, which helps demonstrate a clear boundary between personal and business finances. “Fair” is based on similar market rates for other businesses. Consider setting up a buy-sell, operating, partnership, or shareholder agreement if your business involves other partners. These agreements can outline what happens to an owner’s share in the event of a divorce, thus further protecting the business​.

Protecting Your Business During Divorce

protect business assets in a divorce

During a divorce, protecting your business starts with a thorough business valuation. This process assesses the worth of your business to ensure a fair division of assets. The valuation of a business in divorce can be tricky, so formulas like Pereira and Van Camp are often used in California to tackle these complexities. These formulas are designed to fairly distribute the value of a business that may have grown during the marriage, distinguishing between the spouse’s efforts and external factors.

The Pereira formula is named after the 1909 case Pereira v. Pereira and is used when a business’s increase in value during the marriage is mainly due to the spouse’s efforts, skills, or labor. It starts by determining the business’s value at the start of the marriage and then calculates a reasonable return on this value over the marriage duration. That return is considered the separate property of the spouse who owned the business before the marriage. In contrast, any value increase beyond that return is deemed community property, meaning it is subject to division between both spouses​​​​​.

On the other hand, the Van Camp formula, coming from the 1921 case Van Camp v. Van Camp, is applied when the increase in a business’s value is attributed more to external factors such as market forces or the inherent nature of the business, rather than the direct efforts of the spouse. This approach involves figuring out what a fair salary for the spouse’s work in the business would have been, subtracting any payments made for the family’s benefit from this salary over the marriage years, and then labeling any remaining business value as the spouse’s separate property​​​​​.

Each divorce and business situation is unique, and which method your attorney advocates for can have a great difference in consequences to your case. Courts sometimes mix these methods for a fair outcome, highlighting the importance of having an expert to help you understand the processes, rationales, and results of the valuations.

Silva & Associates: Your Partner in Divorce Planning and Business Asset Protection

Silva & Associates is your go-to firm when your business and financial interests are at stake. Our experienced divorce lawyers bring 100 years of combined expertise to protect your business assets before and during divorce proceedings. From pre-divorce and pre-marital planning to complex divorces involving privately held companies, RSUs, international assets, and more, we ensure your rights are fully protected.

We offer strategic planning services to secure your business interests and personal assets, providing peace of mind as you face these life-changing events. Our focus on practical advice, backed by a wealth of experience and a thorough understanding of California law, positions us as a trusted guide in Alameda and beyond.

Request an appointment today to learn how we can help you protect business assets in a divorce. Divorce is complicated, but with Silva & Associates, you’re not facing it alone.

FAQS on how to protect business assets in a divorce

Q: How do I protect my business from my divorce?

A: To protect your business from your divorce in California, it’s advisable to have a clear and well-drafted business partnership agreement in place. This agreement should outline procedures for handling a partner’s divorce, including the possibility of a buyout or transfer of their ownership interest. Considering a prenuptial agreement for your partner can help specify the treatment of business assets in case of divorce.

 

Q: What assets are protected in divorce in California?

A: In California, community property laws generally dictate that assets acquired during the marriage are considered community property and are subject to equal division in divorce. Some assets may be considered separate property and not subject to division. These typically include assets acquired before the marriage, gifts or inheritances received by one spouse during the marriage but kept separate, and certain assets protected by valid prenuptial or postnuptial agreements.

 

Q: What does a prenup not cover?

A: While prenuptial agreements can cover a wide range of issues, there are some limitations to what they can address. A prenup may not cover matters related to child custody, child support, or any other issues that involve the well-being and upbringing of children. Consult with Silva & Associates lawyer to ensure your prenuptial agreement covers your specific concerns within the bounds of the law.