For many high-net-worth individuals and small business owners in California, a divorce doesn’t just involve personal separation—it involves complex financial untangling, particularly when it comes to dividing business interests. Whether you are the founder of a startup, a partner in a professional practice, or the spouse of an entrepreneur, understanding how California family law treats business ownership is critical to protecting your financial future.
Dividing a business in divorce is not as simple as splitting it down the middle. It involves tracing contributions, determining valuation, assessing goodwill, and understanding how community property laws intersect with entrepreneurship. In some cases, the business may have been started before marriage, but grew substantially during the relationship. In others, one spouse may have stayed home to support the family while the other built the company—raising important claims around equitable compensation.
This article explains how business interests are divided in California divorce, the legal standards that apply, the valuation process, and what entrepreneurs need to do to protect their companies while navigating separation.
California Is a Community Property State—But Business Division Is More Complicated
Under California law, all property acquired during the marriage is considered community property, unless it can be clearly traced to a separate source. This means that, as a general rule, each spouse is entitled to 50% of the community interest in any asset, including a business.
But a business isn’t like a bank account or a house. It may have been:
- Started before marriage and grown during marriage
- Purchased during marriage with joint or separate funds
- Started during marriage but built mostly by one spouse
- Maintained or supported using community labor or investments
Because of these nuances, dividing a business interest requires a careful legal and financial analysis.
Separate vs. Community Property in Business
A key question in any divorce involving a business is: What portion of the business is separate property, and what portion is community?
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Separate Property: If the business was started or acquired before marriage, it begins as separate property. It remains separate as long as there is no commingling of funds or contributions from the community estate.
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Community Property: Any effort, skill, or labor applied to the business during the marriage, especially if it increased the business’s value, may create a community interest in that value—even if the business itself began as separate property.
This means that even if one spouse owned the business before the marriage, the increase in value during the marriage may be subject to division.
The Two Key Legal Frameworks: Pereira and Van Camp
California courts use two primary methods to determine how much of a business’s value should be considered community property:
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Pereira Method – Used when the owner’s efforts during the marriage primarily drove the business’s growth. The court will assign a reasonable rate of return on the separate property portion and allocate the rest of the growth as community property.
- Van Camp Method – Used when the business’s growth is primarily due to external factors like market forces or non-owner employees. The court calculates the value of the owner’s services and assigns that amount to the community, with the remaining value staying separate.
These approaches can produce vastly different results. For example, if a founder worked tirelessly during the marriage to scale a startup, the Pereira method might assign most of the growth to the community. If instead the business’s value grew due to passive investments or a large employee base, Van Camp might preserve most of the value as separate.
Business Valuation: What Is the Business Worth?
Once the community interest is established, the next step is to determine the value of the business. This process can be contentious, especially when the spouse who runs the business tries to downplay its value or the other spouse tries to inflate it.
A professional valuation is typically conducted by a forensic accountant, business appraiser, or CPA. Key factors in valuation include:
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Gross and net income
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Company assets and liabilities
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Past and projected earnings
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Market comparables
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Client or customer base
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Intellectual property
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Contracts and goodwill
The appraiser may use one or more standard approaches:
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Market Approach: Compares the business to similar companies that have been sold.
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Income Approach: Projects future cash flow and discounts it to present value.
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Asset Approach: Values the company based on its tangible and intangible assets.
In high-conflict cases, both parties may hire their own experts, leading to competing valuations. The court may then decide which valuation is more credible or appoint a neutral expert.
Goodwill: The Invisible Asset
One of the most complex issues in business valuation is goodwill—the intangible value of a business beyond its physical assets. This can include the business’s reputation, brand recognition, client loyalty, and especially the personal reputation or skill of the business owner.
In California, both enterprise goodwill and personal goodwill are recognized:
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Enterprise goodwill belongs to the business entity and is generally divisible in divorce.
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Personal goodwill is tied to the specific person (e.g., a doctor or attorney) and is not divisible because it cannot be transferred.
Distinguishing between these types is critical. If a business’s value is mostly due to the owner’s personal relationships or talent, the court may reduce the divisible value, recognizing that goodwill walks out the door when the owner does.
Options for Dividing the Business
Once the community interest and business value are established, the spouses must decide how to divide it. There are several common approaches:
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Buyout – One spouse keeps the business and pays the other their share of the community interest, often using cash, other assets, or structured payments.
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Sell the Business – In rare cases, the business may be sold, and the proceeds divided. This is more likely if neither spouse wants or is able to run the business.
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Co-Ownership – Both spouses continue to own and possibly run the business together. This is rare and typically only works when the split is amicable.
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Offset with Other Assets – The business-owning spouse may retain the business and give up other marital assets (e.g., real estate, retirement accounts) of equal value to balance the division.
Most business owners prefer to retain the business and offer a buyout, especially if they are the sole operator or the business provides primary income.
Business Owner Strategies: How to Protect Your Company
Entrepreneurs going through a divorce can take several proactive steps to minimize disruption and protect their business:
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Prenuptial or postnuptial agreements: If properly drafted, these can clarify that the business is and will remain separate property.
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Maintain separate financial records: Avoid commingling business and personal assets.
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Minimize community labor: Reinvest profits into the company and limit community salary draw where possible.
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Pay yourself a fair market salary: Undervaluing your own labor can result in larger community claims.
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Plan for valuation: Keep records, contracts, and financials clear and current to avoid inflated or inaccurate valuations during divorce.
Legal guidance during business formation or growth stages can also help insulate the business from future disputes.
What Spouses of Business Owners Should Know
If you’re the non-titled spouse, it’s essential to understand your rights. Even if your name isn’t on the business registration, you may have a significant claim if:
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Community funds were invested in the business
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Your spouse used joint income or savings to grow the company
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You contributed indirectly by managing the home or raising children, enabling your spouse to work full-time
The law recognizes both direct and indirect contributions to community property. You are entitled to your fair share of the value your marriage helped create.
Can You Defer Division Until Later?
Sometimes, the court may reserve jurisdiction over the business interest—delaying division until a later date. This happens when:
- The business’s value is uncertain or fluctuating
- It’s impractical to sell or divide the business immediately
- The spouses agree to revisit valuation after certain milestones
This approach can work, but it also introduces risks, especially if the business grows significantly before division occurs. A clear written agreement is essential if you choose to defer.
Tax Implications
Dividing a business in divorce can have significant tax consequences, especially if stock, profits, or future income streams are involved. While most property transfers incident to divorce are non-taxable, you should still consult a tax advisor to evaluate:
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Future capital gains exposure
- Depreciation recapture
- Passive activity loss rules
- Buyout payment tax treatment
Structuring the division with tax efficiency in mind can preserve more value for both parties.
Final Thoughts
Dividing a business during divorce is one of the most complex areas of California family law. It requires legal, financial, and often emotional navigation to ensure that both parties receive a fair result—and that the business remains viable moving forward.
At Minella Law Group, we specialize in high-asset divorce cases and represent both business owners and non-titled spouses. We partner with leading valuation experts and use proven legal strategies to protect your interests, whether you’re seeking to retain your business or ensure you’re compensated fairly for your share.
Going Through Divorce and Own a Business?
You don’t have to choose between protecting your company and protecting your future.
📞 Call Minella Law Group today at 619-289-7948 to schedule a confidential consultation with one of our family law specialists. We’ll listen to your concerns, assess the situation, and create a clear strategy tailored to your goals.
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