Divorce for Business Owners

Author: Larry Chester, President

As emotionally trying as a divorce can be, owners of closely held businesses are faced with the additional pressure of keeping intact what may have taken years of blood, sweat and tears to bring into fruition and make profitable: their business. Adding to that is the weight of assuring other owners, board members and the like that the soon-to-be ex-spouse will not unravel years of hard work. Simply put, spouses who are business owners and are looking at the dissolution of their marriage face a double whammy of stress and angst.

The Illinois Marriage and Dissolution of Marriage Act, the statute that guides the divorce process in Illinois, provides that all marital property (property acquired during the marriage) shall be divided without regard to marital misconduct in an equitable or fair manner. What is considered marital property? Specifically, the statute consider property to be marital that is “all property, including debts and other obligations, acquired by either spouse subsequent to the marriage.” 750 ILCS 5/503. That would include interests in business entities formed after the date of marriage and before the entry of a Judgment of Dissolution of Marriage. Importantly, the statute excludes property acquired prior to the marriage, acquired by inheritance, pre-marital property exchanged for other property, income from pre-marital property and property specifically excluded via a valid pre-nuptial or post-nuptial agreement. When dividing property, a number of factors are considered to achieve that “fair” result, including a few very relevant factors to business owners: each party’s contribution to the acquisition, preservation and increase of value to the property, the existence of a valid pre-nuptial or post-nuptial agreement and the tax consequences to the individual receiving the property. The statute further provides that assets shall be valued using a “fair market value” standard: the amount for which property would be sold in a voluntary transaction between a buyer and seller, neither of whom is under any obligation to buy or sell.

Considering the many unknowns of a divorce, there are steps that a business owner can take to protect his or her efforts in establishing and growing a business:

1. Consider the benefits of a pre-nuptial or post-nuptial agreement that specifically excludes a business from assets to be divided in the event of a divorce. A validly executed prenuptial agreement and well-drafted terms that specifically identify a premarital business guarantees that a business formed prior to the marriage and any income derived from it will be excluded from divorce negotiations. By executing into a prenuptial agreement, a business owner spouse can be assured (and assure other owners) that the business will remain intact in the event of dissolution proceedings and will continue to operate without interference by the other spouse or the courts. A post-nuptial agreement (a contract that can in part define spouse’s interests in property acquired after the marriage) is another useful tool in that it can specifically carve out the business from any divorce negotiations. Owners can be assured that their business remains their business.
2. Do not “commingle” pre-marital business assets or income with assets acquired during the marriage. The IMDMA states that if a non-marital asset is commingled with a marital asset, the non-marital asset can lose its “identity” and the non-marital asset may “transmute” into a marital asset. Be sure to establish accounts solely for business and do not pay personal expenses out of those accounts. Keep transactions clean and traceable.
3. If a business is subject to allocation by the Court because the business was formed during the marriage, consider a buyout via the transfer of other assets. I never recommend to my clients who are business owners to give the soon-to-be ex-spouse an interest in the company. Severing ties financially not only provide ex-spouses with finality, it assures those invested that business will continue smoothly and as planned.

When facing divorce, business owners should employ the assistance of not only a family law and divorce attorney attuned to their unique needs, but a skilled accountant and estate planner so that a comprehensive plan can be made. By doing this, business owners can be assured that what they have built will far outlast dissolution proceedings.