Divorce can be an especially scary process for business owners. Morales Law, P.C. is known for helping Santa Barbara business owners and spouses of business owners achieve desirable results in the divorce process.
If you or your spouse owns a business, we will work with a forensic accountant and other experts to analyze data and determine issues such as the cash flow available for support from the business, determining the value of the business, and determining the separate property and community property portions of the businesses value.
A common question that we are asked is: “Is my spouse entitled to half of my business?” When answering that question one must analyze the following:
- Separate Property vs. Community Property
- Businesses started or acquired before marriage are generally considered separate property. Separate property is not typically divided between the spouses.
- Businesses started or acquired during marriage are generally considered community property. Community property is divided equally between the parties.
- Determining the Community Property Value of Separate Property Businesses
- Even if a business was acquired before marriage, the community may still be entitled to a portion of the businesses value. This is known as “apportionment”, determining the value of the separate property interest in the business vs. the community value in the business. This can be done through several different methods, the most common of which are referred to the as Van Camp approach and the Pereira.
- Business Valuation
- Once it is determined whether, or what percentage of, the business is community or separate property, a valuation of the business will be assigned. If it is community property, one party typically buys out the other party’s interest in the business.
- During a business valuation, we will use:
- Evaluation of sales proceeds
- Assessment of book values
- Adjustment of book values
- Assessment of going concern value
- Assessment of liquidation value
- Determination of capitalized earnings
- What to Do with the Business
- The parties can do the following:
- One spouse buys out the other party’s interest in the business. The court has the discretion to order a payment plan if it is determined that one spouse lacks the liquid funds to buy out the other party’s interest.
- One spouse can retain the business while the other “trades” assets of equal value by agreeing to transfer ownership of assets to the other spouse.
- One spouse can retain the business while the other “trades” assets of equal value by agreeing to transfer ownership of assets to the other spouse.
- The parties can agree to sell the business.
- One spouse can retain the business while the other “trades” assets of equal value by agreeing to transfer ownership of assets to the other spouse.
- The parties can agree to liquidate the assets of the business and sell it.
- The parties can agree to co-own the business and determine a written ownership agreement as to how the business will be operated and who will be entitled to what funds. What to Do with the Business
- Cash Flow Available for Support
- When issues of spousal support and child support are at stake, a determination of Cash Flow Available For Support is conducted. Simply put, a business owners tax returns are only the start of what the court can determine the business owner actually earns. This is due in large part to most business owners deducted personal expenses as business expenses, which may be allowed by the IRS, but can still be counted as additional income in family court. Very frequently, a business owner going through a divorce will be found to earn more income for support purposes than what is listed on his/her tax return.
If you or your spouse is a business owner and you have questions about what will happen to your business in the divorce process, please call Morales Law, P.C. for a complimentary consultation.
THIS IS NOT LEGAL ADVICE. Factual circumstances will vary and require specific procedures. This is for informational purposes only and should not be relied prior to, or in place of, consulting with legal counsel. Morales Law, P.C. can be reached at (805)422-7966 or at www.mysantabarbaralawyer.com.