When California couples are going through a divorce, they may have to decide what will happen to a business in which they both have ownership interests. They may want to continue running it, or one person might want to buy out the other.
It can be difficult for people to keep running a business together after a divorce, but they might choose this option because they both enjoy it or because there is likely to be a large profit later. Couples in this situation should make sure they have a buy-sell provision . This helps ensure that the stock held by the minority owner does not become illiquid. In other situations, both individuals may continue as owners because one lacks the liquidity to buy out the other. If this happens, one person may continue as the manager while the other still has ownership but is not involved in operations.
Couples in this situation might need a put/call option that allows the operator to purchase the other spouse’s share later. They may also want provisions that give the other person some veto rights to prevent the operator spouse from making fundamental changes to the business. If one spouse is able to buy out the other, the spouse leaving the business might want to be protected from any future claims against the business.
In California, a community property state, most property acquired since the marriage is considered shared property and is supposed to be split equally in a divorce. This could mean that one person can claim a significant portion of the other spouse’s business even if that person’s involvement in the business is minimal. If one person owned a business or other property prior to the marriage, the amount of appreciation the asset has had since then may be subject to division.