Determining Community Contributions to a Separate Property Business

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Considering filing for divorce in California? If you and your partner have started a business together, or if one of you has contributed to a business owned by the other, you might want to keep reading.

One might think that if you own a business prior to marriage, or start a business during marriage with separate funds, the business is your separate property.  In a community property state such as California, and absent an agreement or financial arrangement to the contrary, if your partner in any way contributed to that business, those efforts (e.g. time, labor, skill, etc…) made during the marriage are considered community efforts. Therefore, the ‘community’ earns an interest in the business and upon divorce, the law will award the community some of the money derived from the separate property business.

Determining Community Efforts to a Separate Property Business

Generally speaking, the determination of community contribution to a separate property business is a two step process. First, the business must be valued. This number is determined by adding the [1] tangible assets, [2] accounts receivable/payable, and [3] goodwill at the date of separation. Goodwill comes in a variety of forms and may be from [a] the type of business it is (e.g. name recognition of franchise) or [b] the person who owns the business (e.g. owner’s reputation). An expert family lawyer can address this in further detail.

Second, you must apportion a fair amount of the increase in the value of the business to the community. Courts apply one of two formulas (Van Camp or Pereira), depending on whether the business is [1] capital intensive or [2] labor intensive. Work with your lawyer to determine which formula is ideal for your situation.

Keeping a separate business as separate property can be challenging. Drafting an iron-clad premarital agreement that clearly outlines who gets what, ownership, etc… will save you time and money down the road, should you decide to file for divorce in California.

For more information on determining community contributions, or to discuss drafting a prenup, contact the expert Los Angeles family lawyers at Walzer Melcher LLP today.