Can new spouse gain ownership in business?

Dear Alex:

I recently got married and my business partner has expressed concerns over the possibility that my new spouse could gain an ownership interest in our company. My spouse does not want to be involved in the business. What can I do to alleviate my business partner’s concerns?

Although your spouse may have no desire to be involved in “your” business, your spouse may automatically begin to accrue an interest in the business under California’s community property laws.

The community property rules in California are complex. But generally, if you started the business with community assets, or if you put effort into the business during marriage, a least a portion of the business is, or will become, community property. This is true regardless of the fact that only one spouse may be listed as the owner in the company’s records.

Issues may also arise as to whether your spouse, as part owner, can take part in the management of the business. While your business partners may know and trust you, they may not have the same confidence in your spouse, and may have legitimate concerns about sharing ownership and control with your spouse.

Under California law, a spouse who is managing a business may generally continue to do so, but there are exceptions, and once such spouse dies or gets divorced, the issues become more critical.

It is best to have a prior written agreement to deal with these issues. This agreement can take the form of a prenuptial or postnuptial agreement between the spouses, or more simply, a business agreement between all owners.

Such a “business agreement” can be part of the bylaws of a corporation, the operating agreement of an LLC, or a separate “buy-sell” agreement between the owners. It is typically entered into between the named owner and his or her partners, with the addition of a separate document known as a “spousal consent,” in which the spouse agrees to let his or her community property interest in the business be governed by such agreement.

These agreements typically state who will vote or control the interest, and provide that upon the divorce of the named owner, that he or she will have an option to purchase the community interest of his or her spouse. If he or she fails to exercise such option, his or her partners in the business may do so. Upon death, the partners may purchase the interest of the deceased partner, including his or her spouse’s community interest in the business.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on June 9th, 2015. You can read it on the Register's website here: "Can new spouse gain ownership in business?"