Divorce and Business Ownership—Why It Matters

Divorce and Business Ownership—Why It Matters

If you're a business owner in California facing divorce, you're likely asking a critical question: What happens to my business? The short answer is—it depends. California is a community property state, and how a business is divided during a divorce can vary significantly depending on how and when the business was started, how it was managed during the marriage, and whether any legal agreements like a prenuptial or postnuptial agreement are in place.



Divorce can pose serious financial and operational risks to your business if not properly managed. In this blog, we'll break down the key factors California courts consider, including business valuation, ownership interest, community vs. separate property, and ways to protect your business through family law.

3 Key Questions That Determine the Fate of Your Business in Divorce

1. Was the Business Started Before or During the Marriage?

This is one of the most crucial questions in determining how a business will be classified—either as separate property or community property. In California, anything acquired during the marriage is generally presumed to be community property, including businesses.

• Started before marriage: If your business was established before you tied the knot, it may be considered separate property. However, any increase in value during the marriage—especially if your spouse contributed—could be subject to division.
• Started during marriage: Businesses launched during the marriage are usually community property unless a legal agreement states otherwise.

2. Was There a Prenuptial or Postnuptial Agreement?

A well-drafted prenuptial or postnuptial agreement can clearly outline what happens to a business in case of divorce. These legal instruments can designate the business as separate property, protecting it from division. However, the enforceability of these agreements can depend on:

• Full financial disclosure
• Independent legal representation
• Fairness at the time of enforcement

If no agreement exists, courts will default to standard property division laws.

3. Did Both Spouses Contribute to the Business?

Contribution can take many forms—financial investment, labor, marketing, bookkeeping, or even giving up a career to support the business owner. California courts may award the non-owner spouse a share of the business or its increased value if their efforts contributed to its growth.

The more integrated the spouse was in the day-to-day operations or decision-making, the stronger their case for a share of the business or its appreciation.

Community Property vs. Separate Property in Business Valuation

Under California law, the distinction between community and separate property is essential. If your business is classified as community property, it may be subject to a 50/50 division. If it's separate property, you may retain full ownership—but you may still owe your spouse a portion of its increased value.

Apportionment Methods in California

Courts typically use one of two methods to divide business interests:

• Van Camp Method: Used when the business’ growth is attributed more to market factors or outside investments than to the spouse's efforts. The court assigns a “reasonable salary” for the owner-spouse and considers that amount as community property, with the rest considered separate.
• Pereira Method: Applied when the success of the business is largely due to the owner-spouse’s personal effort. The court calculates a reasonable return on the separate property investment, and everything else is treated as community property.

Choosing the method can dramatically affect what each spouse receives, and it's often a source of dispute in court.

How Is a Business Valued in Divorce?

Determining the value of a business is one of the most complex steps in a California divorce involving a business. There are several valuation approaches:

• Asset-based valuation: Totals up the value of the business assets minus liabilities.
• Income approach: Estimates future income and discounts it to present value.
• Market approach: Compares the business to similar businesses that have recently sold.

The court may appoint a neutral forensic accountant, or each spouse may hire their own expert to conduct a business valuation. The valuation date itself can also be contested, especially if the business is volatile or one spouse is still running it.

Hidden Assets and Manipulation

Some spouses attempt to devalue or hide assets during divorce. Business owners may:

• Delay new contracts
• Reduce payroll or sales
• Increase expenses artificially

Courts are aware of these tactics. Discovery tools, subpoenas, and forensic accountants are often used to uncover the true value of a business.

Options for Dividing a Business in Divorce

California family courts generally don’t force spouses to continue owning a business together post-divorce. Instead, courts and parties typically choose one of three options:

 1. Buy-Out

One spouse buys out the other's interest in the business. This often requires:

• A formal appraisal
• A structured payment plan or lump sum
• Use of other marital assets to offset the buyout

 2. Sell the Business

If neither party wants to keep or can afford the business, selling may be the only viable solution. Proceeds from the sale are then divided according to community property rules.

3. Co-Ownership

Though rare and often impractical, some divorcing spouses choose to remain business partners. This is only viable if both parties have a strong working relationship and clear boundaries.

How to Protect Your Business Before Divorce Happens

If you’re a business owner entering a marriage or already married, there are proactive steps you can take to safeguard your business:

Draft a Prenup or Postnup

This is the most effective legal shield. A prenup can specify that your business remains separate property, regardless of growth or contribution during marriage.

Create a Buy-Sell Agreement

This agreement outlines what happens to business shares upon divorce, death, or departure. Many partnerships and corporations include these provisions in their operating or shareholder agreements.

Keep Business and Family Finances Separate

Avoid using marital funds for business expenses or commingling income. This can protect your business from being considered community property.

Pay Yourself a Market-Rate Salary

If you underpay yourself and reinvest all profits into the business, a court may decide that your spouse is entitled to a greater share of its appreciation. A fair salary reduces this risk.

Business Owners in High-Stakes Divorce Cases

High-net-worth divorces involving business assets demand a strategic approach. Legal and financial experts often work together to:

• Preserve business continuity
• Minimize tax consequences
• Negotiate favorable settlements
• Structure complex asset division

From tech startups to professional practices, the outcome of a business-related divorce can make or break an entrepreneur’s future.

Know Your Rights, Protect Your Business

Business ownership adds a layer of complexity to any California divorce. Whether your business is community property or separate, how it’s handled in your divorce will depend on multiple factors: how and when it was started, how it was managed, whether your spouse contributed, and what legal safeguards are in place.

Understanding your options—such as valuations, apportionment methods, and buy-out strategies—can help you prepare and protect your livelihood during this difficult time. Navigating a divorce while maintaining business operations is challenging, but you don’t have to face it alone.

If you’re a California business owner facing divorce, the legal professionals at The Tabo Law Firm are here to support and advocate for your best interests and represent family law clients across the state with diligence, clarity, and trusted experience.