“Does My Ex-Spouse Have A Right To The Business I Started Before We Were Married?”

It is fairly common for one partner to bring a business with them into a marriage and continue to work in that business. Many times those grow over time, and in the divorce, the other spouse tries to claim a share. Is that possible?

While the business remains separate property, the “community” does share in the increase of the business. How that is calculated depends on the nature of the business.

Many times businesses are personal service businesses which grow only by the efforts, time, and work of the person working in the business. If the judge finds that this is the kind of business you have, then the judge will use a formula which was laid in in a case called Pereira. Essentially, the judge will determine the value of the business at the time of the marriage, and add a reasonable rate of return on the investment. Any other growth in the value of the business will be community property and will be divided.

The second type of business is the kind where the business primarily grows either of itself or by outside market forces, rather than by individual work. In these cases, because more of the growth of value is attributed to simply the effects of time, the separate property interest will be larger. It is calculated by taking the value at the time of marriage, and then calculating a reasonable salary for working in the business for the spouse who runs it or owns it. The amount of the salary, multiplied by the years of the marriage, is the community portion. Everything else is separate property.

As you can imagine, fighting over which formula should be used is a fertile area of litigation. In addition, a forensic accountant will have to be hired in both cases because you have to have the value of the business at the time of marriage and at the time of separation determined as the basis for any calculations.

Oftentimes, parties choose to forego formal evaluations and instead do an estimate of what they think the buyout should be and come to an agreement without involving the judge. Although this method is cheaper in terms of attorney fees, it is always very difficult to determine fair value without actually having the business evaluated.

DISCLAIMER: All legal principles quoted are valid as of the date of writing in the State of California. However, you should NEVER base your actions on a legal article, blog, or internet story, as facts in real life are complicated. You should have your case evaluated by an attorney experienced in the area of law needed for your case. In addition, there are often exceptions and potential changes to results that occur due to facts that you may think are trivial or unimportant. This article should not be taken in any way as legal advice on your specific legal matter.

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