Prenuptial Agreements for Business Owners in California

A prenuptial agreement is the only document that lets a California business owner decide, before the wedding, how the company will be treated if the marriage ends. Without one, a business owned before marriage stays separate property on paper, but the growth it earns from the owner’s work during the marriage can become community property, and a family court in Los Angeles County, whether at the Stanley Mosk Courthouse downtown or the Santa Monica Courthouse, will divide that growth. At Borna Houman Law, we draft and negotiate prenuptial agreements for founders, physicians with practices, real estate developers, and partners in closely held firms, and the most common gap we see is a prenup that names the business as separate property and stops there.

Key Takeaway: A California prenup protects a business only if it addresses the growth the owner’s labor creates during the marriage. Labeling the company “separate property” keeps the premarital value separate, but without clauses covering appreciation, salary, and reinvested profits, a court can still award the community a share under Pereira or Van Camp.

Do business owners need a prenup in California?

California does not require a prenup, but a business owner who marries without one accepts the default community property rules for the company’s future growth. Under Family Code section 760, property acquired by a married person during the marriage is community property, and that includes earnings and the value created by a spouse’s work.

A business owned before marriage starts as separate property under Family Code section 770. The Judicial Council’s guide to property and debts in a divorce describes the same separate and community categories. The problem is what happens next. If the owner spends the marriage building the company, the increase in value is partly the product of community labor, and the community has a claim to it.

In our experience, owners are surprised less by the rule than by the size of the number. A company worth $2 million at the wedding and $12 million at separation creates a $10 million question, and the default answer depends on a forensic accountant’s view of what drove the growth.

What happens to a business in a California divorce without a prenup?

Without a prenup, a California court apportions the growth of a separate-property business between the separate estate and the community using one of two formulas, Pereira or Van Camp. Our guide to Pereira vs. Van Camp apportionment covers both in detail.

The Pereira method applies when the owner’s personal efforts drove the growth. The court gives the separate estate a fair return on the premarital value, often around 10 percent simple interest per year, and treats the rest of the growth as community property. The Van Camp method applies when market conditions or the business’s own capital drove the growth. The court values the owner’s labor at a reasonable salary, subtracts what the family already received, and treats the remainder as community property.

For an active founder, Pereira is usually the default, and it usually favors the community. That is the exposure a business prenup is designed to remove, and it is the same exposure our high-net-worth divorce practice litigates when no agreement exists. Our page on business valuation in a California divorce explains how valuation experts approach the same question.

What should a prenup for a business owner include?

A prenup for a business owner should characterize the business, its growth, the income it pays, and any future ventures, and it should set out how the company is valued if the marriage ends. A one-line “the business is separate property” clause does not do that.

We treat six provisions as essential. First, a characterization clause stating that the business, all appreciation in its value, and all reinvested profits are the owner’s separate property, whether the growth comes from market forces or the owner’s personal efforts. Second, a clause that expressly waives any community claim under Pereira, Van Camp, or any other apportionment method. Third, a compensation clause that defines what salary is community property, so the other spouse is not left with nothing if the owner pays a minimal salary and retains profits in the company.

Fourth, a baseline valuation, attached as an exhibit, showing the company’s value at the date of marriage. Fifth, a rule for new businesses started during the marriage. Sixth, a waiver or limitation of reimbursement claims under Family Code section 2640 if community funds are ever invested in the company. Without each one, a court applies the default rule on that point.

How does a prenup compare with the default rules for a business?

The table below compares how California’s default rules treat common business issues with how a well-drafted business prenup can treat them.

Is a business prenup enforceable in California?

A California prenup is enforceable if it is in writing, signed by both parties, and signed voluntarily, and if it was not unconscionable when signed. The rules come from the Uniform Premarital Agreement Act, beginning at Family Code section 1611.

Voluntariness has specific requirements under Family Code section 1615. A California prenup is not considered voluntary unless the party against whom it is enforced either had independent legal counsel or waived counsel in a separate signed writing. At least seven calendar days must pass between the time that party was first presented with the final agreement and advised to seek counsel, and the time the agreement was signed. A party without counsel must also be fully informed of the terms and basic effect in writing.

Disclosure matters most for business owners. Section 1615 allows a court to refuse enforcement when the agreement was unconscionable when signed and the challenging party did not receive fair, reasonable, and full disclosure of the other party’s property and financial obligations. In our practice, that means attaching the company’s financial statements, the most recent valuation, the capitalization table, and a summary of debts and guarantees, and giving the other side and their counsel real time to review them.

Can a prenup cover spousal support for a high-earning owner?

Yes, with limits. Family Code section 1612(c) makes a provision limiting or waiving spousal support unenforceable if the party against whom it is enforced was not represented by independent counsel when the agreement was signed, or if the provision is unconscionable at the time of enforcement.

That second test is applied years later, at divorce, not on the wedding day. A support waiver that looked fair when both parties had careers can fail if one spouse left work to raise children while the business grew tenfold. Business owners often get better protection from a step-up schedule or a capped support amount than from a full waiver. Our guide to spousal support waivers in a California prenup covers drafting options.

How should a prenup fit with an operating agreement or buy-sell agreement?

A business prenup should be drafted alongside the company’s operating agreement, partnership agreement, or shareholder agreement, because those documents control who can own the company’s equity and what happens to it on a divorce. If the prenup and the company documents conflict, the result can be a dispute with your co-owners as well as with your spouse.

Most well-drafted operating agreements restrict transfers to spouses and give the company or the other owners a right to buy out any interest a spouse receives. Those clauses are useful, but they decide only who keeps the shares, not how much the departing spouse is owed. The prenup answers the value question and the company documents answer the control question, so the two need to agree.

California’s Secretary of State business entity records show who manages a company and who signs for it. In our experience, those public filings are among the first records opposing counsel pulls, so the prenup, the company documents, and the state filings should tell the same story.

Worked example: a $2 million company that grows to $12 million

Consider an owner who marries while holding 100 percent of a software company valued at $2 million and separates ten years later, when the company is worth $12 million. The owner’s salary during the marriage was $250,000 a year, and the growth came mostly from the owner’s work.

Without a prenup, a court applying Pereira at a 10 percent simple annual return would allocate roughly $4 million to the separate estate: the $2 million premarital value plus $2 million of return over ten years. The remaining $8 million would be community property, so the other spouse’s share would be about $4 million, before any adjustments the court makes for the facts.

With a prenup that characterizes all appreciation as separate property, treats the salary as community property, and includes a valuation exhibit at $2 million, the company stays with the owner. The community keeps what was paid out as salary during the marriage.

Frequently asked questions

Can I get a prenup if my business is just starting?

Yes. A prenup can cover a business at any stage, including one that exists only as a plan. Early-stage agreements often matter most, because almost all of the company’s value will be created during the marriage.

Can a prenup protect a business started after the wedding?

Yes. A prenup can state that a business formed during the marriage, and its growth, will be one spouse’s separate property. Without that clause, a business started during marriage is presumed to be community property.

How far before the wedding should a business prenup be signed?

California law requires at least seven calendar days between presentation of the final agreement and signing. We recommend starting three to six months before the wedding, because business disclosure, valuation, and negotiation take time.

Can a prenup be changed after marriage?

Yes. Spouses can amend a prenup in a signed written agreement, or sign a postnuptial agreement. Postnuptial agreements face stricter scrutiny in California because spouses owe each other fiduciary duties during marriage.

What if my spouse will work in the business?

Then the prenup should say so directly. It should state how that spouse is paid, whether any equity or bonus is granted, and confirm that the work does not create a community interest in the company beyond the agreed compensation. A spouse’s labor in the business is the fact pattern most likely to support a community claim when the agreement is silent.

Is a medical or law practice treated differently?

Under the default rules, the goodwill of a professional practice built during the marriage is community property and is valued as an asset. A prenup can characterize that goodwill as separate property. Our guide to professional practice valuation explains how goodwill is measured when there is no agreement.

What does a prenup for a business owner cost?

Cost depends on the complexity of the business, the disclosure required, and how much negotiation is needed. Our guide to prenuptial agreement cost in California breaks down the drivers.

By Borna Houman, Attorney at Borna Houman Law, CA Bar #352339. Office: 2530 Wilshire Blvd, Santa Monica, CA.

Disclaimer: This article provides general information about California family law and is not legal advice. Reading it does not create an attorney-client relationship. Every agreement depends on the parties’ facts and finances, so consult a licensed California attorney before signing.