How Can I Ensure My Business is Protected in a Divorce in California?

Divorce is very common in the US, with 40-50% of all first marriages ending in divorce. Divorce is even more prevalent in second or subsequent marriages. In 2022, there were 673,989 divorces. That puts the divorce rate at around 6.2 per 1,000 population.

Many divorcing couples are concerned about their children when they divorce, which is reasonable given that 50% of children will witness their parents’ divorce, but what happens if you own a business?

California’s divorce rate is lower than the national average. Still, the complexity of divorces, including high-net-worth individuals and businesses, can be significantly higher, especially in areas such as Beverly Hills.

Going through a divorce in Beverly Hills can be complicated enough on its own. When a business is involved, it adds a new level of concern and complexity to the situation. If you own a business in California and are worried about how your divorce might impact it, there are several steps you can take to protect your company’s assets and future.

Evaluate Your Current Business Structure

One of the first things to consider is your current business structure and ownership model. If you are a sole proprietor or your business is jointly owned with your spouse, your company’s assets are more exposed in a divorce. Consider incorporating your business or forming a limited liability company (LLC) to better separate your business assets from personal assets. This can limit claims your spouse can make against the business in divorce proceedings.

Update Ownership and Governance Documents

Make updates to ownership and governance documents for your business where it is prudent to limit your spouse’s ability to assert rights to the company. For example, if you own a corporation, issue more shares to yourself to lessen your spouse’s ownership percentage. If you have a partnership or shareholders’ agreement, see if you can add provisions that allow buyouts or transfers of your spouse’s interest. Clearly outline decision-making authority and governance processes to avoid potential disputes.

Consult Divorce Lawyers and Financial Advisors

Work closely with a law firm specializing in divorce cases involving business assets. It’s essential to figure out what’s fair and protect your business.

California’s community property laws mean assets acquired during marriage are typically considered shared property. An experienced divorce attorney can help you review any prenuptial agreement and analyze the best approaches under local divorce laws to protect your ownership interests.

Divide Assets Thoughtfully

When negotiating the division of assets with your spouse and respective legal counsel, the goal should be retaining as much ownership and control of your business as possible. Consider which assets have more short-term liquidity to trade to keep your business. For any business interests or percentages your spouse keeps, look for ways to limit their influence, like denying voting rights if feasible.

Plan for Contingencies

Your divorce lawyer can help plan for “what if” scenarios, such as your spouse still entitled to a percentage of future sale proceeds even after the divorce. You may need contingency clauses in your operating agreement or buy-sell agreement in case of disputes down the road. Also, consider events like death or disability during the divorce process. Make sure your assets go to the appropriate successors in those instances.

Secure Assets Quickly

Once divorce proceedings commence, it is essential to divide and transfer certain assets quickly to secure your business interests. Depending on your jurisdiction, a court could freeze assets or issue temporary orders, giving your spouse shared control. Work with your legal team to properly value assets like future earnings potential and goodwill. Then, move rapidly to separate accounts, refinance in your name only, and formalize asset division through the courts.

With the right strategy, you can limit the business impact and keep your company’s future secure.