Divorces involving a family business raise questions most people have never had a reason to ask. This post is part of a series answering the ones our clients ask most.
Probably yes, the business itself is still your separate property. But the growth in its value during the marriage may not be, and even property that stays separate can be reached by the court. In practice, the answer usually turns on one question: did the business pay you a fair salary while you were married?
Washington law defines separate property to include everything you owned before the marriage, plus its “rents, issues and profits.” RCW 26.16.010. A business you built before the wedding starts out separate, and it stays separate through changes and transitions as long as it can be traced.
So far so good for the owner. Here’s where it gets complicated.
Your work during the marriage belonged to the community
Everything you earn through your labor during the marriage is community property, and that includes your labor running your separate business. So when a separate business grows during the marriage, Washington asks where the growth came from: the work you put in, or qualities inherent in the business itself, like its capital, its market, or plain inflation.
The Washington Supreme Court set the framework in In re Marriage of Elam, 97 Wn.2d 811, 650 P.2d 213 (1982): any increase in the value of separate property is presumed separate, but your spouse can rebut that presumption with direct and positive evidence that the increase came from community labor or community funds. If they succeed, the community is entitled to a share of the increase, not just a token reimbursement.
The salary question decides most of these cases
The practical test courts keep coming back to is this: did the business pay you a fair market salary during the marriage?
If your business is incorporated and paid you reasonable compensation, the community was already paid for your labor. The dividends, the retained profits, and the growth in your stock’s value generally stay separate. That rule goes back to Hamlin v. Merlino, 44 Wn.2d 851, 272 P.2d 125 (1954), and the annotated statutes still state it flatly: where a spouse owns all the stock as separate property and draws a salary, the increase in the shares’ value stays separate because the community was compensated through the salary.
If you underpaid yourself, which most small business owners do for tax reasons, the analysis flips. The underpayment effectively became a community investment in your separate business. In Koher v. Morgan, 93 Wn. App. 398, 968 P.2d 920 (1998), an owner paid himself what the trial court called an artificially low salary and reinvested the rest; because the community’s share couldn’t be untangled from the business profits, the assets bought with the commingled funds were divided as shared property. (Koher involved an unmarried couple, but Washington applies the same rules there.)
If the business is a sole proprietorship, the risk is higher still. Where personal effort and business income mix without any contemporaneous separation, courts have treated the entire increase as community property. And the salary rule can’t be gamed with labels: in In re Marriage of Marzetta, 129 Wn. App. 607, 120 P.3d 75 (2005), the owner argued his above-market salary meant everything else was separate, but his own prenuptial agreement said salary plus bonuses compensated the community, so both were community property.
One honest caveat. Washington’s courts have themselves called apportionment based on an inadequate salary “an uncertain and unsettled legal proposition.” Halvorsen v. Ferguson, 46 Wn. App. 708, 735 P.2d 675 (1986). This corner of the law rewards good records and punishes guesswork, on both sides.
Three more traps worth knowing
Adding your spouse to the paperwork doesn’t convert the property. Washington rejects any presumption that putting both names on a title or deed turns separate property into community property; converting it takes clear evidence of intent, normally in writing. The Supreme Court reaffirmed that in In re Marriage of Watanabe, 199 Wn.2d 342, 506 P.3d 630 (2022).
Tracing doesn’t require perfect records. In In re Marriage of Schwarz, 192 Wn. App. 180, 368 P.3d 173 (2016), a spouse traced separate investments through 13 years of account moves without documenting every transaction, and that was enough. You need clear and convincing evidence, not an exhaustive ledger. But you do need more than your own say-so.
Even truly separate property is before the court. In a Washington divorce, all property is before the court, and the court may award separate property to the other spouse when fairness requires it. The character of the property is one factor among several. In re Marriage of Konzen, 103 Wn.2d 470, 693 P.2d 97 (1985). “It’s separate” is a strong position, not an absolute one, especially in a long marriage.
What you can do
If divorce isn’t on the horizon: pay yourself a documented market rate salary, keep business and personal finances strictly separate, and keep the records that show what the business was worth when you married. The Community Property Deskbook’s own advice to lawyers is to hire a professional valuator when salary reasonableness is at issue, because salary survey data exists for nearly every kind of business. Do the same math before anyone is fighting about it.
If divorce is happening now: gather the formation documents, early tax returns, and anything showing the business’s value at the wedding. The burden of proving separate character falls on you, and it takes real evidence. A valuation as of the marriage date, even a rough one built from old records, is often the most valuable document in the case.
Common questions
My spouse never worked in the business. Does that matter? Less than you’d think. The community claim usually comes from your own underpaid labor, not your spouse’s. Your work during the marriage was community labor even in your own separate company.
The business is an LLC. Same rules? Washington’s published cases involve corporations and sole proprietorships, so LLC cases are argued by analogy. How the LLC pays you, salary versus draws, and how its records are kept will shape which line of cases applies.
Does the growth from inflation count against me? Under Elam, market driven and inflationary growth stays separate, though if community contributions caused part of the increase, the community shares proportionally in the inflation on its part.
This post is part of our series on divorce involving a family business. Read the main guide, Divorce Involving a Family Business in Washington, or see how a business valuation works in a Washington divorce.
Last updated August 2026.
Law Offices of Daniel Ehrlich, Everett. Family law in Snohomish, Island, King, and Skagit Counties. (425) 954-5578.
This article is general information, not legal advice. Every case is different. If you’re facing a divorce involving a business, talk to an attorney.
