Compared to many other countries in the world, the United States is fairly young, with rather unique founding principles. Though the U.S. is well known for certain freedoms such as gun ownership, the country also has a reputation for being a good place to live if you want to be a business owner. According to the U.S. Small Business Administration, there were around 30.7 million small businesses owned and operated in the country in 2019.
Owning a small business can be extremely fulfilling, especially if it is a family-run business. However, owning a business can also pose some unique issues during a divorce. Your business is likely one of your biggest and most valuable assets, not to mention your biggest or perhaps even your only source of income. Needless to say, getting divorced when you own a business puts much more than just your business at risk.
How Will Divorce Affect My Business?
What happens at home stays at home, right? Not necessarily. If you own a business and you file for divorce, there is a chance it could follow you back to your workplace. Happily married couples rarely think about what they are going to do in the event that they get a divorce, but when you are a business owner, this is one of the best things you could do. Getting a divorce when you own a business not only puts much stress on you and your spouse and adds to the divorce process, but it can also actually affect the business itself.
All of a sudden, you may find that you are no longer able to be as present at your business as you once were, both physically and mentally. Before, you likely dedicated much of your time to various management tasks and responsibilities, but a divorce can force you to have to take time off of work for various attorney meetings, court dates, or other divorce-related appointments. You may also need to comply with various demands for company documentation, which can be distracting for not only you, but for your employees as well. Your employees may need to assist with compiling company documents, appraiser’s visits, inventory counts and review, and other document preparation.
Illinois Asset Division Laws and Your Business
Most, if not all, of the decisions made about your business during your divorce will be made during the asset division process. This process involves you, your spouse and each of your attorneys sitting down and hashing out who will get what from the marriage. One of the first things you will have to do is to figure out whether or not the business is even subject to division during the divorce. The Illinois Marriage and Dissolution of Marriage Act (IMDMA) contains all of the relevant laws pertaining to asset division and how it is to be conducted during divorce.
Is My Business Considered Marital Property?
Before you do anything, you must first determine whether or not your business is even subject to being divided. In the state of Illinois, only marital property is subject to division during a divorce. Illinois makes a distinction between marital and nonmarital property; marital property is any property that is acquired by either spouse after the marriage and before a judgment of legal separation or divorce is entered. An easy way to determine if your business is subject to division or not is looking at the date when the business was legally formed. However, this is not a definite method for determination.
In limited circumstances, property acquired during the marriage can be determined to be nonmarital property. For example, the most common situations include property that is acquired through gift, legacy or descent; property that is acquired in exchange for such property; property acquired in exchange for property acquired before the marriage; and property excluded by any legally-binding and valid agreement between the spouses, such as a prenuptial or postnuptial agreement.
Will My Spouse Receive a Portion of the Business?
This is the million-dollar question that everybody has when they first go into a divorce as a business owner. Until the investigation is done and more information is uncovered about your particular situation, it is difficult to say with certainty if your spouse will receive a portion of the business and what that portion will be. When determining how to divide the value of your business, it will likely be lumped into the asset division process.
If it is up to the courts to decide, they will look at the business as just another asset. If a judge is responsible for allocating assets and determining who gets what during your divorce, he or she will do so according to the guidelines set forth in the IMDMA. This means that they will distribute assets in an equitable manner between you and your spouse by considering all relevant factors present in your case. These factors can include:
- How much each spouse has contributed to the acquisition and increase or decrease in value of the marital property
- Whether or not either spouse made any contributions to the marriage as a homemaker
- Whether or not either spouse attempted to or succeeded in dissipating or wasting any marital assets
- How long the marriage lasted
- The value of the property being assigned to each spouse
- The economic circumstances each spouse has before and after property division
- The custodial provisions for any children
- Tax consequences for the property division
- Whether or not the property division is in addition to or in lieu of spousal maintenance
Choosing a Business Valuation Method
Next, once you, your spouse, and your team of attorneys have come to the agreement that you are both entitled to a portion of the business, you must then determine what the business is actually worth. There are various methods of doing this, but the three most popular methods are the income-based approach, the asset-based approach, or the market-based approach. Each business valuation method looks at the business in a different way and has its own drawbacks and advantages. Speaking with your attorney, a business adviser, a financial professional, and/or other business professionals should help you determine which method would be the most advantageous for your situation.
An income-based approach for valuing a business is actually the most common type of business valuation for a divorce. In this type of approach to valuing a business, the company’s past financial health, combined with its current financial health, is analyzed to determine how successful the company will be in the future and how much it will be worth. This is done by looking at the company’s current cash flow, expenses, and profits and comparing them with past performance to come up with a prediction of what the company’s future revenue will look like.
This approach for valuing a business is slightly different from the income-based approach. Rather than focusing on what the company’s revenue is, the asset-based approach of valuation focuses on what assets the company has on hand. This valuation takes into account all of the company’s tangible and intangible assets. Tangible assets include things such as office equipment, inventory, vehicles, or computers. Intangible assets can be things such as intellectual property, like patents, trademarks or copyrights, and accounts receivables which is money that is promised to you but not yet paid and other non-physical items.
A market-based approach to valuing a business is similar to that of how homes are valued from other home sales before they are put on the market to sell. Valuing a business using the market-based approach works by looking at the price of what other similar businesses have sold for recently. The trouble with this type of valuation method, however, is that there is not always a similar business sale to go off of, which is why this method for valuation is the least often used.
Protecting Your Business From Future Distress
Once you have determined how you are going to handle your business during your divorce, you probably have decided that you will do whatever it takes to protect your business from anything like this ever again. There are a few ways that you can do that in the event you ever decide to get married again.
Prenuptial and Postnuptial Agreements
The easiest way to ensure your business is protected is by having a contract drafted and signed by you and the other party. The best way to do this is before you get remarried is through the use of a prenuptial agreement. A prenuptial agreement can spell out the ownership and distribution terms for your business and any other assets that you and your future spouse own. If you do not sign a prenuptial agreement before you get married, you can always have a postnuptial agreement drafted and entered. Postnuptial agreements are very similar to prenuptial agreements, with the major difference being when they were signed. Because of this difference, prenuptial agreements can sometimes be easier to uphold during a divorce, but both options will offer you protection in the event that you do have to go through this process again.
Other Methods of Protection
If you do not choose to sign a prenuptial or postnuptial agreement, there are still ways that you can protect the value of your business if you were to remarry again. One such way is making sure that your business formation records and documents show that you are the sole owner of the business and that the business ownership cannot be transferred in the event of a divorce. You should also be sure to keep your personal finances and your business finances separate from each other. Once the two types of finances become commingled with one another, the situation can become much more complicated than it was going to be. Lastly, you should be sure that you are paying yourself a competitive salary compared to others in similar positions in your industry. If you underpay yourself to invest money back into the business, your spouse could argue that the marriage did not benefit from the business as much as it should have.
Contact Our DuPage County High Asset Divorce Attorneys Today
If you own a business and you are contemplating divorce, you should know that the road ahead is not an easy one. Getting a divorce when you are a business owner can be long and contentious, but the knowledgeable high asset divorce lawyers at Weiss-Kunz & Oliver, LLC are here to help. We understand the issues that can come along with a divorce involving a family business. Our skilled Elmhurst, IL high asset divorce lawyers are here to provide you with the legal support and guidance that you need during your divorce. Schedule a consultation with our lawyers today by calling our office at 312-605-4041.