Protecting business assets in a divorce

The community property law in California requires family law judges to divide marital estates equally in divorce cases, but the assets that divorcing spouses acquired before they got married are usually considered separate property. However, separate assets may become subject to division if they are commingled with marital property, which often happens when one spouse forgoes a career in order to allow the other spouse to devote their full attention to running a business. In these situations, judges could recognize the contribution made by the spouse who maintained the household and rule that at least part of the business is community property.

Postnuptial agreements

Entrepreneurs who wish to avoid this situation should bear in mind that about half of all marriages end in divorce and take proactive steps to protect their business assets . One way they can do this is by drafting prenuptial or postnuptial agreements. These agreements cannot contain provisions dealing with child custody or visitation, but they do allow spouses to decide how their assets will be divided in a divorce. However, entrepreneurs who decide to pursue this option should make sure that the agreements they draft are negotiated openly and basically fair. This is because family law judges are reluctant to enforce prenuptial agreements that are grossly inequitable, were negotiated in bad faith or were signed under duress.

Buy/sell agreements

When businesses are owned by more than one person, buy/sell agreements can provide a way to prevent them from being divided in a divorce . These agreements could require unmarried business owners to sign prenuptial agreements if they get engaged. They could also stipulate that their fiancés must sign documents that waive their right to seek an interest in the business.

Mediation

When divorcing spouses are unable to reach an amicable agreement at the negotiating table, their attorneys may suggest trying alternatives to litigation like mediation or collaborative divorce. Court battles are both public and expensive, and there is no guarantee that either spouse will be happy with the judge’s decision. Alternative methods are not as adversarial, far less costly and conducted behind closed doors.