How Businesses and Professional Practices Are Divided

The Community Property System of Property Division

In the United States, different states divide property upon divorce using either the community property system or principles of equitable distribution. California uses the community property system of dividing assets upon divorce.

In a California divorce case, the parties are entitled to an equal division of community property. All property acquired during marriage qualifies as community property unless the parties prove that the asset in question constitutes their separate property. Property acquired before marriage or after the date of the parties’ separation is considered to be separate property. Also, property a party acquired in their sole name during the marriage by gift, bequest, or devise, qualifies as separate property.

Dividing Businesses

Under California’s general community property rules, businesses acquired during the marriage will be deemed to be a community business to which both parties have an interest upon getting divorced. However, businesses acquired before marriage or after the parties’ separate date will be the sole and separate property of the party who acquired it.

However, businesses have a life of their own, and their value does not remain static, as a result. Thus, if a business that one party already established prior to marriage experienced growth during the marriage, that growth may be community property if it could be attributed to the use of community property funds or the non-owning spouse’s efforts.

Dividing Professional Practices

The characterization of a professional license as community or separate property does not depend entirely on whether it was acquired during the parties’ marriage. Thus, for example, a person’s medical licenses or license to practice law is not divisible upon divorce. However, the value of a professional practice as a business may be subject to division during divorce proceedings.

The Division Process

A person’s ownership interest in a business generally gives them the right to run a business and share in its profits. However, how does a court divide these rights in a divorce? One method courts might use is called an “in-kind” division. Another, more common, approach to dividing a business is called a division “by sale.

An in-kind division of a business occurs when both parties simply split ownership rights in a business. For example, imagine that one spouse started an e-commerce business selling baby products on Amazon as a partner with a third-party with a 50% ownership interest. An in-kind division of that business would give 25% of the total business to one spouse and 25% to the other spouse. This method of dividing a business is particularly appropriate for situations where both parties dedicated substantial time and effort in operating the business.

In contrast, a division by sale occurs when one party “buys out” the ownership interest of their spouse or the parties split the proceeds after selling the entire business. This method is appropriate for situations where one spouse’s interest in the business is attributed solely to its character as community property, rather than any attention or effort running the business on their part.

Consult Moshtael Family Law for Legal Advice

If you are going through a challenging divorce involving complex issues such as the division of a business or professional practice, you should consult an experienced attorney from Moshtael Family Law for legal advice. At Moshtael Family Law, our attorneys have substantial experience with family law matters such as property division upon divorce.

To arrange a free, confidential consultation with one of our attorneys, call us at (714) 909-2561 or contact us online today.