California’s Community Property Law and How It Could Affect Your Business

Did you know that California’s community property law could affect your business? Business owners should be aware when selecting their business type to take California’s community property laws into consideration.  You do not need to be divorced to be affected by the community property law.

What does “community property” law mean?

California is a community property state, meaning spouses own an equal, 50% and 50%, share of their pooled resources (acquired during marriage).  Not all states have community property law, and not all community property states have the same distribution expectation. For example, Texas has equitable distribution community property law, meaning a spouse can be awarded an equitable share of property depending on how much they contributed to the acquiring of the property. However, in California it’s important to remember that a spouse does not need to contribute to the community property in order to be entitled to fifty percent of it.

If in California, your husband has a 9-5 salary job and you own your own home business which takes off and becomes the primary income for your family, and if you decide to get divorced, your husband could take 50 percent ownership of your business even though he’s not even sure what you do.

What counts as business community property?

All of it. Business property can include the brand, real estate property, equipment, intellectual property such as patents and trademarks, contracts, and even your reputation. Your prenup should include all relevant business assets.

Protect your business from the beginning

When drafting your partnership, shareholder, or operating agreements, be sure to include requirements that will protect you and your partners or fellow shareholders in the event that one of you marries and then divorces. These requirements should include:

• Prenuptial agreement waiving the spouse’s interests in the business;
• Disallow the selling or gifting of shares without mutual agreement or chance to purchase the shares in order for existing shareholders to further control the company;

A good contract or business attorney can assist in drafting the necessary provisions to protect your business from a bad divorce.

Treat yourself like an employee

Many business owners either don’t take a salary, or invest their salary back into the business.  This isn’t an issue until you are married and your spouse complains that your business is your baby. Then you get divorced and suddenly your spouse claims that you never shared your income with him or her. As a result of you not sharing your income, your business now becomes your spouse’s business.

Avoid losing your business and start paying yourself wages. Take a salary and treat yourself as an employee. Consider a S-corporation elect or talk to a qualified business attorney for the options that best suite your unique situation!

Lum Law Group has been handling business contracts and corporate accounts since 1965. Contact us for reliable advice!