Dividing A Business In An Illinois Divorce

This article will discuss valuing and dividing a business in an Illinois divorce. We will answer the following questions:

• How do I know if my business is marital property?
• What valuation method is best for my business?
• What options exist for dividing a business in divorce?
• How can I keep my business legally separate from my marriage?

Illinois is an "equitable division" state. In divorce, equitable division means that marital property must be divided equitably or fairly, regardless of the circumstances. Some assets are easy to split, such as vehicles and shared savings accounts. Negotiating who gets to keep the family home can be more difficult. Perhaps the most complicated process of a divorce is dividing a business and all its assets. It's not enough that one person spent most of their time working to build the company; if the business was started after marriage, it becomes marital property.

How Do I Know If My Business Is Marital Property?

The answers to two questions can quickly tell you if your business is considered marital or non-marital property in Illinois. (1) Did the business start before or during the marriage? (2) If the business started before the marriage, have any funds from a joint account been used in the company? Another factor that has a significant impact on determining whether a business is marital or non-marital property is if the spouse contributed in any way to the business.

If the business was started during the marriage, assume it is marital property. Unless you take steps from the outset to legally separate the business from the marriage — something we will discuss later in this article — it will be considered marital property, just like everything else bought, earned, and brought in during the marriage. Starting a company before getting married and keeping separate finances can go a long way in ensuring it remains non-marital property. However, if your spouse has contributed in any way, even as trivial as giving you suggestions from time to time at the breakfast table, assume the other lawyer will argue that it's marital property.

What Valuation Method Is Best For My Business?

Either party in a divorce can't arbitrarily pick a number that they believe represents the business's value. If you're the one who put all the sweat equity into the business, you may inflate its value. Conversely, knowing that your spouse may get a portion of the company might lead you to diminish its value in negotiations. In the end, it doesn't matter what you feel the company is worth; the court will want to see experienced opinion and proper documentation before dividing company assets. In a divorce, the three most common methods for valuing a company include:

• The asset approach. Your businesses' assets, accounts receivable, and brand value is combined to get a total value. Determining a brand's value in the public eye is difficult and normally requires industry professionals' input.
• The market approach. The market approach is probably the simplest option. A lawyer or accountant looks at the recent sale of companies similar in size and industry to yours and calculates a value. If your company is unique or one of a kind in its industry, then the market approach is inappropriate.
• The income approach. An attorney and accountant compile your tax returns, profit-and-loss statements, accounts receivable, and existing customer contracts to determine your company's current and potential value.

What Options Exist For Dividing A Business In Divorce?

Many business owners learn that any litigation involving the company is usually bad for business. After establishing the company's value, attorneys will urge both parties to negotiate a settlement rather than letting the process drag out in litigation. Standard settlement options include:

• Buy out the other party. If the other party lacks liquidy, they secure outside financing or take out a loan. 
• Co-ownership. Co-ownership is an option only if the divorcing couple can maintain a civilized working relationship.
• Sell the business and split the proceeds. While this option may leave both parties with the most accurate representation of their share, it will dissolve the corporation.

How Can I Keep My Business Legally Separate From My Marriage?

Good luck. In all seriousness, keeping a business separate legally from your spouse is very difficult. Here are a few ways to avoid being forced to divide your company in divorce:

• Have your spouse sign a postnuptial agreement. A postnuptial agreement concerning your business would indicate that your spouse has no interest in the businesses' valuation, splitting business-related assets, and dealing with litigation. However, a postnuptial agreement doesn't mean that the business's income isn't factored into the settlement negotiations.
• Sign a prenuptial agreement. The agreement would stipulate that the business is entirely separate from the marriage. No matter what happens during the marriage, the company will not be included when dividing marital property.
• Set up an ownership structure that handles divorce. Companies with multiple partners are increasingly drafting ownership agreements that address divorce. Many have a first right of refusal clause that allows the other owners to buy out the partner, blocking any ownership shifting to the spouse.

If you fail to legally separate your business from your spouse at the outset, it becomes nearly impossible to argue that the business remained apart from the marriage, especially if you have been married for many years. For more information on any updates to business law read our article Illinois Business Law Changes.