As a marital estate increases in value and complexity, the prospect of divorce can become more frightening for people. Professionals who have dedicated years of their lives to establishing a strong reputation and the credentials necessary to run their own businesses may fear the possibility of their spouses trying to claim a portion of the business’s equity when they divorce.
Under community property statutes, income and property may be at risk of division when couples decide to divorce. For a career-minded individual, their professional practice may be their top priority as they prepare for divorce. The organization may be their only source of revenue and may represent years of sacrifice and investments.
If a professional is the sole owner of their business, can they claim it as separate property when they divorce?
Only certain resources are separate property
Identifying separate property while preparing for divorce proceedings can be a counterintuitive process. People often look at ownership documents and assume that they can retain any assets that they own independently. Unfortunately, property division rules do not prioritize ownership records.
Instead, the main consideration is usually the date of asset acquisition and the resources used to obtain or maintain the asset. In theory, a business might seem like it could be separate property. The professional who owns their own practice may have started the company before they got married or inherited a professional practice from a family member.
Inheritances and items owned before marriage are often separate property when people divorce. However, co-mingling separate property with marital property can lead to its inclusion in the marital estate. Professional practices typically require ongoing investments to purchase new equipment or maintain facilities.
People reinvest their marital income in the business, which can constitute commingling. People may also have their spouses perform uncompensated labor for the organization, which can also lead to allegations of commingling. Maintaining a professional practice as separate property is often achievable if spouses signed a marital agreement affirming that the company remains separate.
Otherwise, the professional who owns the practice may need to negotiate directly with their spouse to settle property division in a manner that lets them retain sole ownership of the practice. The value of the business and other key details can influence the most effective way to address a professional practice in an upcoming divorce.
Spouses preparing for complex, high-asset divorces may need assistance, and that’s okay. Recognizing that a business may not be separate property can help a spouse start developing a strategy to protect their company during property division proceedings.