There is no denying that a divorce can be a complicated process. The legal dissolution of a marriage is not simply signing a piece of paper. Decisions about important issues need to be made, including how a couple’s assets and property will be divided. In some situations, spouses may have complex or high net-worth assets, including a family business. It can be difficult to determine how to handle the company’s ownership after the divorce, especially if both spouses are active in running the day-to-day operations. There are several options when it comes to dividing this intangible asset. Regardless, it is important to hire a knowledgeable divorce attorney to help protect your rights. 

The Equitable Distribution of a Company

According to Illinois law, marital property is subject to equitable distribution. This means that any assets or property acquired during the marriage will be divided fairly but not necessarily equally in half, or 50/50. Some couples may create a prenuptial agreement to decide ahead of time how to disperse marital assets in case they get divorced. Some couples may choose to sell the business, continue to jointly own it, or buy out their share.

When considering what happens to a business, if one spouse started a company before he or she got married, the business may be considered non-marital or separate property. In other cases, one or both spouses may have opened a store or launched a business together after they took their vows. In these instances, the business would likely be classified as marital property. 

With all the issues your divorce might bring – child custody, child support, and more – the division of marital assets can seem especially complicated. If you and/or your spouse own a business, the proceedings can be even more complex. Illinois is an “equitable distribution” state, which means a court will determine how to split assets fairly instead of just dividing your and your spouse’s assets precisely in half. Therefore, you must have a business valuation conducted to accurately determine the company’s worth. To receive your fair share of this asset, it is important to hire an experienced divorce attorney, who, along with a financial professional, can ensure your rights are protected every step of the way.

What Valuation Method Is Best for My Business?

There is not a one-size-fits-all approach to valuating a business, and a forensic accountant along with a skilled lawyer will typically choose from these three methods:

• The market approach: With this method, an appraiser would look at what similar businesses were sold for recently and use those values as a reference.
• The income approach: In this case, an appraiser compiles your profit-and-loss statements, tax returns, and any customer contracts to determine your earnings in the near past and estimate what you are likely to earn in the near future.
• The asset approach: As it sounds, this method uses your business’ assets, accounts receivable, and enterprise goodwill, which is the value that your name or brand carries in the public’s eye. It is difficult to estimate this last item’s value, but that is why you need subject matter professionals to help you place a value on your business.

What If My Business Is Non-Marital Property?

Just because you acquired your business before your marriage does not mean that you do not need a proper valuation during your divorce. Your spouse may be eligible for some of those assets if you invested any marital funds in your business. For example, if you used $10,000 to renovate your retail space and you earned $20,000 in profit, your spouse could receive a portion of the initial investment and a portion of the profits.

Any divorce can come with myriad complications that can create stress not only for those going through the legal process but also for any children and other family members involved. When there is a business involved, things can become even more stressful with many factors for the court to consider. Before discussing the business valuation in a divorce with your spouse, heading into mediation hearings, or making requests of the court, you should understand how a divorce can impact your business and how a business can impact your divorce. 

Reaching a Mutual Decision

Open communication is encouraged when two parties are seeking a divorce. If you own a business, whether it is considered marital property or not, discussing the business and its assets with your ex can mean much fewer headaches in the future. Reaching an agreement concerning who owns or runs the business as well as making other vital decisions without needing the courts to decide for you will always be the best option.

Marital Property vs. Non-Marital Property

If a mediator or the family court needs to get involved in the process of separating assets, the first thing determined is whether it is marital property or non-marital property. 

Building a business takes years of effort. The last thing you want to have happen is to lose the business, or a substantial portion of it, in a divorce. Three ways to protect your business in a divorce include: (1) Creating a prenuptial or postnuptial agreement, (2) Keeping clear documentation that the business was acquired with non-marital assets, and (3) Seeking early advice from a divorce attorney with substantial experience in handling divorces for business owners.

Is My Business Marital Property?

Under Illinois divorce law (750 ILCS 5/503), all marital property is subject to an equitable division between the spouses. Marital property includes all assets and debts acquired by either spouse during the time of the marriage, including income earned by the efforts of either spouse. Therefore, if you started a business during your marriage, it is most likely marital property.

However, your business will generally be considered your separate, non-marital property if:

Prior to filing for divorce, a devious spouse may try to hide assets either to capture a greater share of the marital estate out of greed or fear of future financial insecurity or to prevent their spouse from getting a fair share out of spite. This is more likely to happen when certain conditions exist. If any of the conditions discussed below exist in your marriage, then be sure to alert your divorce lawyer about your concerns. Your attorney may recommend hiring a forensic accountant who can study several years’ worth of your tax returns, bank statements, and other financial records to uncover evidence of hidden assets.

When to Be Concerned About Hidden Assets

Some conditions that create greater opportunity for assets to be hidden include:

• Wealth. In a high-income, high-asset divorce, assets may be spread across numerous investment accounts, real estate holdings, and expensive personal property such as antiques, jewelry, and boats. A couple may also have multiple sources of income. The more complicated the marital estate, the more options a spouse has for hiding places. A devious spouse could also try to argue that parts of the estate are actually their separate property, acquired before marriage, by gift, or by inheritance.

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