Dividing a business in a divorce can be complex, with issues such as the type of ownership, asset valuation, and any non-marital business assets affecting the division. Frequent outcomes are co-ownership and sale of the business. It is also common for one spouse in Oakbrook Terrace, IL, to end up with sole possession and to compensate the other spouse.
How Do You Divide a Business in a Divorce in Illinois?
Illinois equitable distribution means that a business started after the marriage is usually marital property. It does not matter if one spouse devoted his or her time to the business while the other did not. Exceptions can apply, though. For example, prenuptial or postnuptial agreements may address the business, or ownership structures such as LLC, shareholder agreement, or partnership may address what will happen if partners get divorced.
If one spouse started the business before marriage, it could still become marital property in Oakbrook Terrace, IL, depending on whether joint funds were used at any point or if the non-owner spouse made financial or non-financial contributions to the business.
Types of Business Ownership
Ownership structures, such as limited liability company, general partnership, and shareholder agreements, address how to handle divorce. A right of refusal clause is common. It enables other owners to buy out the divorcing partner if they want to. In effect, it can block ownership from shifting to the other spouse.
Other common types of ownership include sole proprietorship, limited partnership, limited liability partnership, and corporation. In cases of a family business, its structure can be an LLC, partnership, corporation, or something else. The considerations may become even more complex and might include the roles and contributions of various family members, including non-spouses.
What Is Asset Valuation?
Business appraisers often combine asset-based, market-based, and income-based valuations.
Asset-based valuation tends to be most useful for businesses, such as manufacturing companies or real estate holdings, with a lot of tangible assets. Examples of these assets may include land, buildings, machinery, equipment, vehicles, and inventory.
In a simple example of asset-based valuation, an appraiser adds the estimated value of all assets and subtracts the liabilities to arrive at the business’s net asset value. Appraisers may use the book value method or the fair market method.
In book value, appraisers analyze the cost of assets as the company’s balance sheet lists them. These figures may not reflect the assets’ current market value, especially with appreciation or depreciation. In the fair market value method, appraisers use current market value. Variables influencing it often include intellectual property and the market value of real estate and equipment.
Market-based valuations compare a business with similar ones that have recently been sold or that are traded publicly. It can be a good choice for businesses with a large presence.
In the comparable sales method, typically used with small businesses, appraisers examine similar sale prices. In the public company analysis method, appraisers look at price-to-earnings ratios and other valuation multiples from publicly traded companies in the same industry.
Income-based valuation determines business value based on its future cash flow. It can be a good choice for businesses that primarily have intangible assets, strong growth potential, or complex finances.
In discounted cash flow, appraisers use a discount rate from cash flow projections to reflect the risk of investing in the business. In the capitalization of earnings method, appraisers divide projected future earnings by a capitalization rate (the perceived risk and return of the business investment).
Comprehensive business valuations usually combine many approaches to offer the most accurate estimates of a business’s worth. Specific approaches may hinge on the type of business and the unique circumstances of the case.
Factors Considered in Determining the Division of Ownership Interest
The marital settlement agreement that the parties sign details the terms and conditions of their divorce. It outlines dividing a business in divorce as well as other issues such as health insurance, child support, and spousal maintenance. Each case is unique, and the parties typically have flexibility in determining how to divide ownership interest in the business.
Marital Versus Non-marital Property in Oakbrook Terrace, IL
Marital property in Illinois usually includes property that either spouse acquires during the marriage. Examples include income, real estate, bank accounts, and sometimes businesses or business interests. If non-marital property increases in value during the marriage, the increase might also be considered marital property.
Non-marital property includes assets one spouse owned before the marriage or that he or she got as a gift or inheritance before or during the marriage and kept separate, and anything specifically addressed in a prenuptial or postnuptial agreement. As an example, if a spouse had business interests before the marriage, they are typically non-marital property and not subject to division in divorce.
However, things can get complex, especially in longer marriages. This may happen if one spouse owned a business before marriage, but the efforts of both spouses contributed to the business increasing in value. That increase in value could be marital property.
If you are claiming your business as non-marital property when dividing a business in divorce, you need to be able to prove ownership through non-marital means, such as inheritance. Documentation and records can help make your case.
Options for Dividing Business Ownership in a Divorce
Co-ownership, sole possession, and sale are the main options for dividing a business in divorce. Co-ownership may occur if neither you nor your spouse can or want to buy out the other’s share of the business, or if both of you desire to stay involved in the business. Many divorced spouses have gone on to manage a business together successfully, but it is helpful to draw up agreements with clear terms and precautions.
In sole possession, one spouse compensates the other with, say, the marital home, cash in bank accounts, joint investments, or something else, in exchange for that spouse’s share of the business.
A business sale may occur, too. Sometimes, both spouses are fine selling the business. In other cases, it is a hard decision for one or both but may make the most financial sense. Selling the business can also simplify equitable distribution.
Seek Legal and Financial Advice
Divorce laws are complex, and so is dividing a business in divorce. Seeking legal and financial advice in Oakbrook Terrace, IL, helps you protect your best interests and streamlines many processes.
How Attorneys Specializing in Business Divorce Can Help You
Legal advice helps you navigate the various issues effectively and within the confines of the law. For example, it is not simple to identify marital and non-marital property. Disputes can arise easily, even over a business one spouse owned for years before getting married.
Divorce lawyers can help you determine if any parts of the business need to be divided and which you can consider separate, non-marital property. If your spouse is challenging you, lawyers can help you build a case to protect these non-marital assets. The opposite holds, too, if your spouse seems to be claiming marital property as non-marital.
Attorneys can help you answer questions such as, “Is it worth contesting a divorce?” It may be if your spouse is trying to withhold divorce business assets that are rightfully yours. Similarly, divorce attorneys help with negotiation and settlement agreements that help you avoid long and costly court battles.
With lawyers, you can customize your divorce in the way that makes the most sense for your business. Even better, you can do so with less financial and emotional stress than if you tried going it alone. Lawyers help ensure you make decisions based on facts and what is in your best interest rather than emotions such as relief, happiness, guilt, or shame.
Also, in a marital settlement agreement vs. divorce decree, the MSA is what the spouses sign to get a judge to approve. It can cover areas such as business division, parenting time and responsibilities, ownership of pets, and amount and length of child support and spousal support.
A divorce decree is a court order finalizing the divorce. Despite the divorce being final, there is flexibility for changes down the road. It’s not uncommon for one ex-spouse to find out later that his or her ex concealed a key business asset. Your business divorce lawyer can explain the implications of returning to court over that issue.
Consult Professionals to Navigate the Financial Aspects of Divorce
Financial professionals can help you get the business valuation right and account for factors such as assets, income, debts, and market conditions. They can figure out the tax implications of dividing a business in divorce and minimize your tax liabilities. They can also work with lawyers to ensure the business keeps meeting its creditor obligations while operating smoothly.