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How Do I Protect My Small Business in Divorce?

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By Joshua E. Stern, Divorce and Family Law Attorney

Dividing assets is often one of the most complex parts of dissolving a marriage—and if you own a small business, protecting it in divorce is likely top of mind. Depending on when you created your business and how you run it, it’s likely considered a marital asset, which can be challenging to divide.

As a divorce and family law attorney, I aim to ensure you come out on the other side of divorce with as much financial health and stability as possible, so protecting your business is critical.

What happens to my business if I get divorced?

A small business is an asset—maybe your most important one—and our team works to protect your assets as fully as possible before, during and after divorce. We use the same rules to categorize a business as any other asset. Illinois uses a broad definition of marital property. Unless the business was acquired by gift, inheritance, or before the marriage (or purchased with gifted, inherited, or pre-marital money), the presumption will be that the business is a marital asset, subject to division, just like any other marital asset.

A business, unlike a bank account, does not have an easily discernible value. You may want an independent valuation of the business that you and your spouse can rely on. A business valuation considers the resale or marketable value of your business, less the goodwill—meaning your goodwill and reputation. Experts will evaluate the state of your business and determine its value. If you and your spouse are unlikely to agree on a valuator (or value) you may each need to retain your separate experts to assess the value.

After the valuation is complete, we typically advise clients to seek buyout of the business from their non-owning spouse. The value and buyout are situational and can vary greatly depending on the business.

Some businesses may be essentially worthless without the owning spouse, and not viable for resale. But, even in this situation, the business still has assets (such as a building or laptops), which would be divided during divorce.

How do we determine spousal support?

In addition to dividing property, you and your spouse have to determine spousal support. When doing so, many of my clients are nervous about double dipping, or having one stream of income counted two times.

For example, if you bought out your non-business-owning spouse from your business, it’s now completely yours. However, if you have a maintenance obligation, you may end up paying your spouse with a portion of the income from the business. The question then becomes whether the buyout for your spouse’s business interest constitutes a waiver of prospective income from the business or whether maintenance must still be paid.

In Illinois, there is no explicit law about what to do in this situation. Because the law is unclear and experts disagree how to handle (and avoid) double dipping, each case is very unique.

Our team specializes in complex financial cases and can expertly support you in disentangling your personal and professional finances to ensure that you are paying a fair amount in spousal support and retain your business.

What if I started my small business before I was married?

If you enter your marriage as a small business owner, you should have a prenuptial agreement in place. Prenups can designate your business as a non-marital asset and ensure that it doesn’t become commingled with marital assets.

If you’re already married and own a business, you should establish a post-nuptial agreement with your spouse to designate the business as a non-marital asset.

 What can I do to protect my business?

In addition to a prenup or postnup, the best way to protect your business is to run it like a business. This means never using business funds for personal expenses, paying yourself a salary, paying your spouse as an employee for any business-related labor, and ultimately keeping your personal and professional finances carefully separated. Otherwise, you risk having to reimburse your spouse for the time they spent on your business and/or for the marital time you applied to a non-marital asset.

Contact Our Divorce and Family Law Firm in Evanston, Chicago, Lake Forest and Oakbrook Terrace

Whether you’re in the midst of divorce and need to ensure you retain your business and its value, or you own a business and want to preemptively protect it with a prenuptial agreement or postnuptial agreement, our team is here to support you.

Contact us at (847) 868-9584 or request a free consultation online. We have offices on the North Shore in downtown Evanston and Lake Forest, as well as in Chicago and Oakbrook Terrace. We’ll happily meet with you at the location most convenient to you.

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For a free consultation, call Stern Perkoski Mendez at (847) 868-9584 or contact us.