• Robert Tsai

Characterizing Businesses and Business Interest

Businesses and business interests can be community property divisible upon divorce. Businesses and business interests’ characterization is dependent upon the type of business in question. Businesses can be classified as sole proprietorships, partnerships, or corporations. Even the goodwill attached to a business can be divisible upon divorce.

A sole proprietorship is separate property if one spouse began the business before marriage, or the business was started using traceable separate property. The income from the business earned after marriage is community property, but assets the business-owning spouse owned before marriage are characterized as separate property, so long as the two are not commingled. Typically, upon divorce, a sole proprietorship’s assets are awarded to one spouse and the business’ post-divorce earnings are not subject to division.

In a partnership, only a spouse’s partnership interest can be community property since the partnership property does not belong to the spouse, but to the partnership itself. If partnership interest is divided upon divorce, the receiving spouse does not necessarily obtain the right to make decisions in the partnership, only the right to receive a share of the partnership profits and surplus. Furthermore, obtaining this right does not subject the receiving spouse to partnership liabilities.

Characterization of corporations is governed by the inception of title rule. If a corporation was incorporated during the marriage, even if it was an ongoing, unincorporated business before marriage, the business will be characterized as community property. An increase in stock value does not change the character of the corporate stock. For example, if corporate stock was purchased before marriage, but the increase in value occurred during marriage, that stock, with its higher value, will all be considered separate property. Even if an interest in a corporation is characterized as separate property, the community estate can be eligible for reimbursement claims where community property was used to benefit the separate property.

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