A married couple in California might own a business together, and over the years that business may have seen much growth and success. However, the couple’s marriage may not have been as successful as their shared business, and the time may come where they decide to divorce. When this happens, they will need to decide how to deal with the family business in the property division process. The following are three options couples in this situation may want to consider.
One spouse keeps the business
One option is for one spouse to keep the business, and buy out the other spouse’s share in it. This buy-out is generally not treated as a direct sale for income tax purposes. A buy-out in this manner is deemed incident to divorce if the buy-out takes place within one year of the divorce or it is related to the cessation of marriage meaning that the divorce decree requires the buy-out and the buy-out happens within six years of the divorce. In a buy-out, the spouse keeping the business must make sure they have the liquidity for a buy-out or the are able to obtain financing in order to do so.
Both spouses sell the business
Sometimes, if neither spouse wants to continue with the business or if a buy-out is not feasible, selling the business may be an option worth considering. In this situation, an independent business valuation will need to be performed. Then the spouses will have to agree on a sales price. Once the business is sold, the spouses can split the proceeds. Sometimes it can take years to sell a business, so spouses who choose this option should have a plan as to how the business will be managed in the meantime.
Both spouses stay on as co-owners
Sometimes both spouses do not want to leave the family business, even if they are divorcing. If they are on good terms with one another, it may be possible for them to stay on as co-owners of the business. This entails a certain amount of cooperation between the spouses even after they divorce. It can help for both of them to formally agree in writing on what their roles in the business will be post-divorce, to reduce the chances for disagreements and friction that could lead to a breakdown of the business.
Learn more about property division and divorce
When spouses who own a business together divorce, difficult decisions will need to be made regarding how to handle the family business. Ultimately, this post is for educational purposes only and does not contain legal advice. Our firm’s webpage on property division may be useful to those who want to learn more about this topic.
