How to Protect Your Business in a Divorce

Getting married is a big life event, but for business owners, it comes with additional financial and legal considerations. If you own a business (or plan to start one), it’s essential to understand how marriage can impact ownership, liability, and finances. It’s also important to know how you can manage these aspects in a divorce. 

 California is a Community Property State

California follows community property law, meaning that most assets and debts acquired during marriage are equally owned by both spouses. If you start a business before marriage, it may be considered separate property, but growth in value during marriage could be community property. If you start a business after marriage, it’s generally considered community property. This applies unless you take steps to protect your business before marriage.

Therefore, if you ever divorce, your spouse may be entitled to a share. Even if your business was separate property before marriage, if its value increased due to your efforts during marriage, that growth could be partially community property (Marriage of Van Camp, 1921).

There are some ways to keep your business separate from your marriage. For example,  if you owned your business before marriage, you can help distinguish your business from you marital property through careful financial management techniques such as:

• Don’t mix personal & business funds  – If community funds are used for business purposes, your spouse could claim a reimbursement right in a divorce.
• Pay yourself a fair salary – If you underpay yourself and reinvest profits into the business, your spouse could later argue that they are entitled to a share of those retained earnings.
• Keep detailed financial records – Clear financial records are necessary for a court to properly evaluate the business and how it ties into marital property.

However, even when taking these precautions your business still will not be fully protected and will remain subject to the courts valuation and discretion. For the maximum amount of control over how your business is viewed during a marriage and divorce, you need a prenup. 

A Prenup For Business Owners

A prenuptial agreement (prenup) is one of the best tools a business owner can use to protect their business before marriage. In California, prenups are legally enforceable under the Uniform Premarital Agreement Act (UPAA) (Fam. Code §§ 1600-1617). Here’s how a prenup can specifically address the key concerns of a business owner:

Keeping the Business as Separate Property

A well-drafted prenup can ensure the business remains entirely separate from community property throughout the marriage, even if its value increases. It can also specify whether or not income from the business is subject to division and specify what happens if community funds are used. 

Preventing a Forced Sale or Buyout

Without a prenup, a judge could order a business sale, buyout, or division of assets to satisfy community property claims. However, with prenup in place, you would have control over how any business-related financial claims would be handled and even prohibit the forced sale or division of the business.

Protecting Business Partners & Investors 

If your business has partners or investors, they likely don’t want your spouse gaining an interest in the company after a divorce. A good prenup for your business could include clauses to protect other stakeholders.

Prenups Protect the Spouse of a Business Owner

While a prenuptial agreement is often seen as a safeguard for the business owner, it also provides valuable benefits for the non-owner spouse by ensuring clarity, security, and fair financial arrangements. Beyond protecting the business from division, a well-structured prenup can establish financial support for the non-owner spouse, such as fair spousal support (alimony), a lump-sum settlement in place of business-related claims, or guaranteed access to marital assets like a home or retirement funds. These provisions prevent financial vulnerability and ensure fair compensation for any sacrifices made, such as staying home to support the business or care for children.

Financial Transparency

One way a prenup benefits the non-owner spouse is by requiring both spouses to fully disclose their assets and debts before marriage, providing a clear understanding of the business’s value, income, and potential risks. This transparency prevents financial surprises and helps both parties enter the marriage with informed expectations.

As a result, if the business carries debts—such as loans, liabilities, or lawsuits—the non-owner spouse can make sure that they are not responsible. They can take precautions to protect joint marital assets from creditors, shielding themselves from unexpected financial burdens.

 Inheritance and Estate Rights

In the event of the business owner’s passing, California’s default inheritance laws could lead to disputes over business ownership. A prenup can clarify inheritance rights, ensuring the non-owner spouse receives designated assets or a fair portion of the estate. Aligning with an estate plan, this protection helps prevent legal battles over business succession and secures the spouse’s financial future.

A prenuptial agreement is the most effective way for business owners to protect their company, financial interests, and future while also ensuring fairness for their spouse. It offers clarity and legal safeguards, preventing disputes over ownership, business appreciation, and financial responsibilities in the event of a divorce. At the same time, it provides financial security and transparency for the non-owner spouse, ensuring they are not left vulnerable. By addressing these concerns upfront, a prenup creates a foundation of mutual understanding, protecting both partners and allowing them to focus on building a strong marriage without uncertainty about the business.