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Is Your Small Business Separate or Community Property?

It is hard enough dividing up house, car, and bank accounts in a divorce. But what about a business?

Maybe you started your business in college, long before you got married. Or maybe you and your spouse started the business together.

Is your small business separate property or community property? How do you divide that up?

Started During Marriage

This is the easy scenario. Income from your efforts during your marriage is community property. Similarly, a business started during the marriage, even if by only one spouse, is generally considered community property.

Started Before Marriage

If you started a business before marriage, the business is generally considered separate property, until you get married. That's when things can get dicey.

Usually, income coming from separate property, such as rent from a separate property house, remains separate property. However, income derived from a spouse's labor and effort during a marriage is community property.

These two rules may seem to conflict in this situation. If a spouse did not work in or manage a separate property business, then the whole value of the business remains separate property. If a spouse did work in the business and contributed to the business' growth during the marriage, then that growth in value, starting from the date of marriage, is generally community property.

2 Examples

Example 1: Husband started an ice cream shop before marriage. The day before the wedding, the ice cream shop was worth $50,000. After the wedding, Husband decided to retire and hire somebody to manage the shop. When Husband and Wife divorced, the shop was worth $95,000.

In this situation, the shop remained separate property because Husband did not participate in the business after marriage. So the $95,000 value of the shop was all separate property.

Example 2: Husband started an ice cream shop before marriage. The day before the wedding, the ice cream shop was worth $50,000. After the wedding, Husband continued to work in the shop. When Husband and Wife divorced, the shop was worth $95,000.

In this situation, the $50,000 value of the shop pre-marriage would remain separate property. The extra $45,000 value attributable to Husband's work during the marriage would be community property.

If you have a small business and are involved in a divorce, an experienced family law attorney will be able to help you classify your business as separate property or community property.

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