In Illinois, all marital property is subject to equitable division between spouses. However, in high-asset or complex divorce situations, identifying marital and non-marital property can be difficult. To complicate matters, if one or both spouses own or possess stock/shares in a business, these business assets must also be identified and valued during the divorce.
Can My Business Be Classified As Marital Property?
The Court considers anything acquired during marriage to be marital property, so long as it does not fall into the definition of non-marital property. This includes property that was acquired before a marriage or was gifted to a spouse.
This principal also applies when identifying and valuing business assets involved in divorce. If one or both spouses acquired a business during the marriage, with or without marital funds, the Court considers it marital property. Businesses owned prior to the marriage, but have financial contributions that were made with marital funds, may also be considered marital property, at least in part.
How Will My Business Be Valued During My Divorce?
Valuing A Business Based On Structure
Business structure can affect how the Court divides it among spouses. The most common business structures are:
- Sole Proprietorship
- Corporation/S Corporation
- Limited Liability Company (LLC)
In several of the above formations, the business belongs to one individual, and thus that spouse owns a 100% interest in the business. If this individual bought the business using marital funds, it is marital property. Therefore, it is subject to division. On the other hand, corporations and S-corporations could offer more protections to prevent businesses from division in a divorce
Business owners may use three main approaches to value a business throughout a divorce. Each approach has pros and cons, and one may be better suited for your business than another.
Asset Approach – Adds together all the assets and liabilities of a business to determine the overall value.
Market Approach – Compares business to similar businesses to determine value.
Income Approach – Evaluates the cash flow to determine the present day value of expected future profits.
It is not uncommon for one, or both of the spouses, to enlist the help of experts to identify and value business assets in a divorce. Professionals, such as forensic accountants or an appraiser, examine the business’ financial documents, tax returns, asset holdings, and liabilities to determine how much an asset or a business interest is worth.
When spouses choose to hire an outside party to conduct the business valuation, they can help ensure no factors are overlooked, undervalued or concealed from the other spouse.
How Will My Business Be Divided?
How much a spouse receives from business assets during a divorcevaries. Oftentimes, both spouses can negotiate a settlement that compensates the non-owner spouse by awarding him/her other assets that are of equal or greater value to what the spouse would otherwise receive if a business was liquidated
Other common outcomes when it comes to the division of a business include:
- One spouse buys out the other.
- Both spouses agree to sell the business.
- The spouses remain co-owners (rare).
How Can I Protect My Business Assets During Divorce?
Without a prenuptial agreement, there are other ways business owners can maintain full ownership of their business assets. One option is to sign a postnuptial agreement when the business is created. This will identify how assets of the business will be purchased and/or divided in the event the marriage terminates. Another option is for the business owner(s) to set up an ownership structure, such as an LLC, partnership or shareholder agreement, which sets forth a valuing procedure in the event an owner goes through a divorce
An experienced attorney, especially one familiar with high-asset and complex divorce litigation, can ensure you and your business assets are protected. Contact our team at Strieker Law Firm, LLC to learn how we can help.