There are multiple complex issues involved in any divorce, and owning a business can worsen this complexity. Spouses may co-own a business, one spouse may have owned a business prior to marriage, or a spouse may have started a business during their marriage. Each of these situations comes with its own unique challenges during a divorce, and there are other unique circumstances that spouses may face. A business needs to be valued during the division of property in divorce and categorized as separate or marital property.
Classifying a Business as Separate or Marital Property
Illinois is an equitable distribution state, meaning that, when marital property is divided during divorce, the court will review several factors about a marriage to determine what is equitable. This division may be equal or it may not be. Marital assets are the only assets that are split in divorce, and separate assets are not subject to division. This is why it’s essential to determine if a business is considered separate or marital property. If the business is marital property, each spouse has equal rights to it, and it is subject to division between spouses.
A business obtained during a marriage is almost certainly considered marital property. Marital property is any property gained throughout the course of a marriage. This is the court’s assumption unless one spouse proves that an asset gained during a marriage is separate. It may be separate property if:
- One spouse received a gift or inheritance.
- It was obtained by a spouse with their separate assets.
- The property was designated as separate in a marital agreement.
Assets that were separate can become marital assets through commingling and transmutation. A spouse can also retain ownership of separate property while interest on the property is marital.
A business obtained before a marriage may be considered separate property, but there are further complications. Even if the business is separate property, the other spouse may still be owed compensation for the future growth of the company.
Factors That Determine If a Business Is Separate or Marital
The courts will look at several facts specific to a couple’s business and marriage when determining if the business is separate or marital. This includes:
- Funds used in the creation of the business, the amount, and if the funds were separate or marital
- The date the couple was married
- The date the business was created, acquired, or invested into
- The amount of funds and assets that the spouses invested and if those assets were separate or marital
- Each spouse’s involvement in the business, including financial input, effort, and time
If the court determines that the business is marital property, or that it is separate property but the other spouse is still owed some compensation, there are several legal options available to spouses.
How Can a Business Be Divided?
Spouses may actively co-own the company, or it may simply be considered marital property. There are several methods that spouses can use to divide a business during their divorce. These include:
- A Buy-Out. One spouse can buy out the other spouse with liquid assets or by trading them a greater percentage of other marital assets equal to the value of the business.
- Co-Ownership. If a couple co-owns a business already and believes that they can maintain a strong working relationship, they may continue to co-own it.
- Sale. Spouses can sell the company and divide the proceeds. However, if one or both spouses want to maintain the business and continue to operate it, this is not a good option.
- Paycheck. One spouse may receive a regular paycheck or a portion of the profits. This is also a strong option when the business is considered a separate asset but a spouse is still owed part of the future profits.
Q: Is My Spouse Entitled to Half My Business If We Divorce in Illinois?
A: If the business is considered marital property, then yes, a spouse is entitled to half the business. A business may be marital property if it is co-owned by spouses or if one spouse founded it during the marriage. Even if a spouse began a business prior to the marriage, once their spouse contributed to the business, it is likely marital property.
Even if a business is marital property, spouses have several options for division. They can sell the business to split the profits, the business-owning spouse can buy out the other spouse, or the couple may continue co-owning a business.
Q: How Is Money Split in a Divorce in Illinois?
A: Money, and all assets and property in an Illinois divorce, is divided according to equitable distribution laws if it is divided by the court. The court will look at facts about the marriage, such as:
- The length of the marriage
- The contributions of each spouse to marital property
- Each spouse’s income and earning capacity
The court will use these facts to determine a fair and equitable split of assets. Spouses can avoid equitable distribution law by either creating a marital agreement before or during their marriage or by negotiating a separation agreement outside of court.
Q: How Is the Value of a Business Determined in a Divorce?
A: A business may be valued based on its assets minus its debts, its market value, or its past and predicted income. The value of a business is important, whether it is marital or separate property. The value of each spouse’s separate property will impact the equitable distribution of assets. The value of a business is important if spouses are planning to split it between them.
Q: What Money Can’t Be Touched in a Divorce?
A: Separate assets and property are not up for division in a divorce. Separate property is anything that either spouse owned prior to being married. It also includes assets gained during the marriage if one of the following is true:
- The asset was an inheritance given to only one spouse.
- The asset was bought with separate assets.
- The asset is labeled separate through a marital agreement.
A spouse claiming that an asset that was gained during a marriage is separate holds the burden of proof.
Proactively Protect Your Business
There are steps that business owners and spouses can take to protect their business. If you want to shield your business from the potential damage of divorce, or are in the process of a divorce involving a business, contact Stange Law Firm.