When is a Business not a Business?
By Henry F. Lewis on February 04, 2020
I came into a case where one of the big issues was the value of a business. The parties had been arguing about it for some time, with one side saying the business was worth hundreds of thousands of dollars, and the my client saying it wasn’t worth much.
The parties were ready to go to trial on the issue, when I became involved in the case. My question was, “is this a business at all?” The answer ended up being “no”, thanks to In re Marriage of McTiernan & Dubrow
Before the Court or the parties can answer the question as to the valuation of a business, or the community property interest, the question should be asked – “is it a business.” Often times with sole proprietorships (or similar businesses), it may look like a business on paper, but it really is just a person.
In answering that exact question, the McTeirnan Court observed there were two possibilities: A person “doing business” or a “professional, commercial or industrial enterprise with assets, i.e., an entity other than a natural person.” The McTeirnan Court found that there was a distinction in California law between a person “doing business” and a professional, commercial or industrial enterprise with assets: The import of this distinction was carefully discussed in McTeirnan. A professional, commercial or industrial enterprise may potentially contain goodwill which can be valued and transferred from person-to-person, while a person doing business does not contain such goodwill. The McTiernan Court found that conflating a person “doing business” with that of a professional, commercial or industrial enterprise creates a conflict between the Bus. & Prof. Code § 14102, and the fundamental concept that property is transferable.
In the context of a dissolution, a professional, commercial or industrial enterprise may potentially contain goodwill which is property can be valued, apportioned, and divided, while a person “doing business” is not property subject to division. The Court can look to various factors including whether or not there are other employees, equipment, a building, or other factors.
In my case, the client had offered a settlement amount to resolve the issue, which was rejected. When we went to a settlement conference, I argued McTeirnan applied, and the court agreed. It saved my client a good sum of money, and made settling the other issues easier.
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