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Divorce proceedings where one person is a business owner

On Behalf of | Jan 10, 2022 | Divorce |

Dividing property in most divorces is usually a straightforward process. However, when a business is involved, the task can become extremely complicated. Dividing a business can make the divorce process feel like settling a dispute rather than an emotional/financial proceeding. Read on to learn more about divorces where one person is a business owner. 

Illinois laws concerning a spouse’s business

In Illinois, the law requires a business to be included in the division of property process. A business can be included in a settlement regardless of the spouse’s position in the company.

You should also note that Illinois uses the equitable distribution method of property division. This dictates that a marital business should be divided fairly between the spouses.

Please note that a business may be referred to as marital property if it was started after marriage even if it was started by only one of the spouses. However, it is possible to take steps to legally offset and separate your business from your marriage.

Valuation methods for a business in a divorce

Either spouse could potentially pick a figure that they believe represents their business’s value. If you played a huge role in setting up and establishing the business, you might be tempted to inflate its value. However, this might lead to a diminished value from your spouse once they learn you want to inflate its value.

All the same, the court expects an expert opinion and proper documentation before they divide their business. The three common methods that the court recommends in a business valuation are as follows:

  • Using the asset approach. With this approach, the court will determine your business’s value by calculating its accounts receivables, assets, goodwill, and brand value
  • The market approach. With this approach, your lawyer will look at the recent sale of comparable businesses and calculate its value that way
  • The income approach. With this approach, your attorney or accountant will compile your business’s tax returns, accounts receivables and profit-and-loss statements to determine value

Exceptions that apply in a business division during a divorce

Specific exceptions may apply in the business division process if one spouse played a significant role in establishing the business. These exceptions apply to spouses who are particularly savvy about protecting their business during a divorce. They are:

  1. When there’s a prenuptial or postnuptial agreement that dictates ownership of the business.
  2. The set-up of your business. A business structure like an LLC (which may include a shareholder agreement) or partnership agreement may explicitly explain how you and your spouse handle the business during a divorce.

Even though your business remains separate property based on the exceptions above, specific caveats can still make the business marital property. For instance, if you used a joint marital fund to keep the business afloat, involved your spouse in running the business, or took ideas from your spouse and used those to grow the business, this might transform what would otherwise have been considered separate  into marital property.