The terms set during a divorce can influence spouses’ financial circumstances for many years. How they divide their property has an outsized impact on their recovery from the divorce. Under community property statutes, most resources acquired during marriage are subject to division.
However, certain assets are separate property. Spouses don’t have to share property that they acquired before getting married. It is often possible to preserve inherited property as separate assets. A business or professional practice may have been part of an individual’s inheritance from their grandparents or parents. They may have started the company long before they chose to marry.
Can one spouse retain sole ownership of a business by claiming it as separate property during a divorce?
Businesses usually require reinvestment
Establishing a business as separate property is not a fast and simple process. Frequently, the non-owner spouse may have grounds to assert that the business is actually partially marital property. They can make this claim because of commingling that occurred during the marriage.
The use of marital property, including income earned during the marriage, to maintain or improve the business may constitute commingling. It blurs the lines between separate property and marital assets. As such, spouses may be able to claim that a business that could theoretically be separate property is at least partially community property.
Commingling claims could also arise in cases where the spouses perform uncompensated labor for the business. Unless the owner of the business or professional practice is fastidious about maintaining separate finances or negotiating a marital agreement protecting the company, business equity could influence the outcome of property division proceedings.
Splitting the company isn’t necessary
The good news is that while the value of the business may influence property division proceedings, community property rules do not force spouses to equally divide every asset in the pool of community property. Instead, they can use the value of certain resources or financial obligations to justify decisions regarding other assets and debts.
One spouse’s retention of a business or professional practice could lead to the other retaining retirement savings or a greater share of the equity accrued in the marital home. Business owners who worry about the loss of business equity during divorce can potentially negotiate settlements with their spouses that prioritize the preservation of sole ownership. If they litigate, then a judge ultimately decides how to address the business.
Learning more about complex divorce proceedings involving business holdings can be beneficial for owners and their spouses. Although business holdings may seem like separate property, they are frequently subject to community property statutes.