Is a Business Considered Marital Property in a California Divorce?
A business or business interest, whether in the form of a partnership, corporation, LLC, or sole proprietorship can be considered marital property in a California divorce. In California divorces, “marital property,” is more commonly known by the legal term, “community property.”
The first step in determining whether a business is community property is to determine who owns it. The business might be the separate property of either spouse, or it may be community property.
Absent a premarital agreement, assets acquired during marriage are presumed to be community property in California divorces.[i] Such assets are split evenly in divorce. Assets owned by a person before marriage, assets acquired by gift or inheritance, or assets acquired after marriage are separate property.[ii]
This means that a business created by one or both spouses during marriage will likely be treated differently from a family business one spouse inherited, for example. In the first example, the business is likely the parties’ community, or marital, property. In the second example, the business is likely separate property.
If the business is one spouse's separate property, it will likely remain separate property, subject to reimbursements or community interests, if any. It is possible to inadvertently create community property interests in separate property business.
How can community property interests possibly be created in a business started before marriage (and is separate property)? It works as follows: when the value of a business increases after marriage and before separation by the effort of a spouse, the increase can be considered community property and will thus require apportionment.[iii]
[i] California Family Code §760 [ii] California Family Code §770 [iii] See, Pereira v Pereira (1909) 156 C 1, 7; Van Camp v Van Camp (1921) 53 CA 17, 29
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