Friday, August 3, 2012

Divorce and the Family Owned Business

Issues of family law and community property often arise in the course of business legal planning.   Although nobody likes to think about it, divorce happens.   As with many risks, the best way to minimize the potential for problems is a thorough understanding of the law and thoughtful planning.

California defines community property as any property acquired during marriage that is not acquired by gift or inheritance.  Although community property rules are a mainstay of the family law courts, they also are an important issue in the context of a family owned business. These rules apply to spouses as well as registered domestic partners in California

One area where this comes up frequently is the manner in which stock in a Corporation or membership in an LLC is held.  If a couple is incorporating a business or starting an LLC, they must decide how they want to hold title and what their respective ownership rights will be.  Just like with title to real property, corporate stock or LLC memberships can be held in a variety of different forms, each with their own implications.  Each situation and circumstance is unique and calls for a thoughtful decision to be made by the couple.  A consultation with an attorney to discuss how to hold ownership interests in a business can help minimize problems later in the event of a divorce and can also be extremely beneficial with respect to the couples’ estate planning.

No matter how the ownership interests are held, divorce of business owner spouses may be a difficult challenge to overcome.  If the couple is not able to continue to work and run the business together, then the couple may need to sell the business to an outsider or have one spouse or partner keep the business and offset the value with other marital assets.  Both of these latter options require a proper valuation of the business which is often difficult once owners are no longer on the same page.   If the business owners define in advance the methods and manner they will use to value their business, it can reduce valuation and litigation expenses in the future.

Although nobody plans for divorce, it is a reality that must be addressed in business planning for spouses and domestic partners.  Couples entering into business together should understand California’s community property rules and should hold title to the business in a way that best suits their needs.  If you and your spouse own a business or are starting a business, call Alvis Frantz and Associates 925-516-1617 or email to schedule a consultation now, to protect for tomorrow. 

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