How Is Business Ownership Addressed During a Divorce?

 Posted on September 30, 2022 in Division of Assets

Getting a divorce can be a difficult process, regardless of the situation surrounding the end of a couple's marriage. However, there are some issues that can complicate the divorce process, and if they are not handled correctly, a case can become much longer, more drawn-out, and more expensive. Financial concerns related to the division of marital property can often lead to contentious disputes, and this is especially true in situations involving business ownership. Whether divorcing spouses own a business together, a spouse owned a business before getting married, either spouse has an ownership share in a family business, or a couple owns multiple types of business interests, it is important to understand how these assets will be addressed during the divorce process.

The law firm of Weiss-Kunz & Oliver, LLC provides experienced, dedicated representation during complex divorce cases. We understand the challenges that can arise when dividing business interests during divorce, and we work diligently to protect the rights and interests of our clients throughout the divorce process. We can work with financial experts to ensure that business assets are valued properly, and we will advise our clients on the solutions that will protect their financial interests going forward.

When Do Business Interests Need to Be Addressed During a Divorce?

When it comes to dividing business assets and other types of property during the divorce process, the first step is to determine which assets are considered marital property and which are separate property. Generally speaking, any asset acquired during the marriage is considered marital property, while assets that were acquired before the marriage or after the date of a legal separation are considered separate property. 

However, there are some exceptions to this rule, including in cases where marital assets and separate assets become commingled. This may occur if a spouse owned a business before getting married, but the business increased in value during their marriage. For example, a couple may have chosen to invest marital funds in a business in order to expand its operations, and in these cases, the increase in value of the business during the course of their marriage may be considered marital property.

A non-marital business may also increase in value due to the contributions of the other spouse. If the business owner's spouse worked at the company and made efforts to improve its operations, build its customer base, or otherwise add to its value, they may be reimbursed for these contributions when dividing marital assets during the divorce process.

Determining the Value of Business Assets

During the process of dividing marital property, it will be important to establish the value of a business. A business valuation may need to be performed for both marital and non-marital business assets. By determining the value of a marital business, this will ensure that a couple's assets can be divided fairly and equitably. Establishing the value of a separately-owned business may also inform the decisions made during the property division process, since it will show the financial resources that are available to a spouse.

There are a few different ways that business assets can be valued in a divorce. The most common method is to have the business appraised by a professional appraiser. The appraiser may look at a number of factors, including the value of the company's physical assets and intangible assets, as well as its current and future earning potential. Appraisers or other financial experts may take a number of approaches to determine a business's value, and they may use methods such as:

• Calculating assets and liabilities - This approach simply tallies up the value of the company's assets, subtracts its liabilities, and arrives at a business equity value. Assets may include cash on hand, accounts receivable, inventory, real estate, equipment, vehicles, intellectual property, or anything else of value that is owned by the business. Liabilities may include short-term and long-term debt, accounts payable, taxes owed, and other financial obligations.

• Projecting future earnings - This valuation technique estimates the value of a business by looking at its current and future earning potential. A variety of methods may be used to estimate future earnings, including examining past financial performance, considering industry trends, and making assumptions about the company's growth. This can provide an idea of how the business may increase in value over the next several years, and it can give spouses an understanding of the benefits that a business owner may receive in the future.

• Determining market value - This valuation method looks at how much other businesses in the same industry have sold for recently, and it uses this information to arrive at a value for the company. This method may be used if a couple expects to sell a business during their divorce, and it can provide a good estimate of the amount they should be able to receive and divide between them. However, it may not be easy to properly value a business if there are no comparable companies in the local area or if there are unique factors that could affect the potential sale price of the business.

Options for Dividing Business Interests in a Divorce

Once a business has been properly valued, there are a few different options for dividing it between divorcing spouses. Different approaches may be taken depending on each spouse's previous level of involvement in the business and whether one or both spouses wish to maintain ownership of the business going forward. 

In cases where a business is the primary source of income for a spouse, maintaining ownership may be crucial to ensure that they will be able to meet their future financial needs. Entrepreneurs who have built a business from the ground up will most likely want to make sure they can continue to reap the fruits of their labor. Family businesses may also present additional complications, especially if other family members are also employed by the company, have ownership shares in the business, or are involved in the management and operations of the business.

Generally, couples who own a business will choose one of the following options during their divorce:

• Sell the business - In some cases, the best solution may be to put a marital business up for sale and divide the proceeds between the divorcing spouses. This can provide each spouse with a fair share of the business's value, and it will allow them to move on without having to deal with ongoing issues related to the business. However, many business owners are reluctant to turn control of their business over to someone else, especially if they are concerned about how their employees and clients will be affected.

• Sole ownership by one spouse - If one spouse has been more involved in owning and managing a business, they may wish to continue to do so going forward. The other spouse may be willing to give up their ownership stake in the business in exchange for other assets, such as the family home or a greater share of retirement accounts. If necessary, an ongoing payment plan may be set up in which the spouse who maintains ownership of the business will pay off the amount owed to the other spouse over time. Sole ownership can be an advantageous arrangement if the divorce is amicable and both spouses are willing and able to negotiate a fair property settlement. However, in these situations, it is crucial to make sure that the business is properly valued before any assets are transferred. In addition to understanding the tax implications of this type of transfer, a couple will need to be sure to understand how the business may increase in value in the future to ensure that their property settlement will not unfairly favor one spouse over the other.

• Co-ownership by both spouses - In some cases, divorcing couples may choose to continue to own and operate a business together after their divorce. This can be an ideal arrangement if both spouses are equally involved in the business and they are able to work together cooperatively. However, it is also a good idea to make plans to address changes that may occur in the future. A clearly-defined partnership agreement can ensure that spouses fully understand their roles and responsibilities, and it can help to prevent any disagreements that may arise down the road. It can also include provisions that address situations where one party may choose to leave the business in the future, and it may allow one partner to buy out the other's share of the business if necessary.

Addressing Business Ownership in Prenuptial and Postnuptial Agreements

Because business interests can be valuable assets, spouses who are business owners may wish to take steps to protect their interests and make decisions about ownership of a business well before divorce ever becomes a possibility. For a person who owns a business before getting married, a prenuptial agreement may be used to establish that the business is separate property and, therefore, not subject to division in the event of divorce. If a business was founded or acquired while a couple was already married, a postnuptial agreement may be used to address business ownership, and it may specify how business interests and other marital assets will be divided in the event of a divorce. 

These agreements can help ensure that both spouses are on the same page about their finances and goals for the future, and they can provide peace of mind if a divorce occurs. If a prenuptial or postnuptial agreement is in place when a couple chooses to get a divorce, the terms of the agreement will generally be followed unless the agreement is determined to be legally invalid and unenforceable. By working with an attorney when creating a prenup or postnup, business owners and their spouses can make sure their rights and financial interests will be protected if they choose to get a divorce in the future.

Contact Our Elmhurst Business Valuation and Asset Division Attorneys

No matter what your situation may be, it is important to seek out experienced legal guidance if you are considering getting a divorce. Whether you and your spouse own a business together, or one of you was a business owner before you were married, you will need to make sure to understand the value of your business assets, which will allow you to divide your marital assets fairly. At Weiss-Kunz & Oliver, LLC, our DuPage County business asset division lawyers can help you to understand your options and make decisions that are in your best interests. We will work with you to help determine the value of your business, make sure all of your marital assets are properly accounted for, and negotiate a property settlement that will provide you with the financial resources you need. To learn more about how we can help you complete the divorce process successfully, contact our office today at 312-605-4041 and schedule a consultation with our attorneys.

Sources:

https://www.ilga.gov/legislation/ilcs/documents/075000050k503.htm

https://www.nfib.com/content/resources/legal/a-small-business-owners-guide-to-divorce/

https://www.smbceo.com/2019/11/19/how-to-value-a-small-business-for-divorce/