Many couples divide a business in an Illinois divorce through negotiation. Otherwise, a court steps in to determine whether the business is marital property and how to divide it. The court may order a professional valuation and decide how to distribute the ownership or compensation proceeds. In either case, the goal should be an equitable outcome that protects each spouse’s financial interests while minimizing disruption to the business.
Working with an Illinois divorce attorney helps with accurate valuation and equitable division. For guidance in Chicago and Des Plaines, call The Rogoff Law Group at 847-768-2194.
Understanding Business Valuation in an Illinois Divorce
A business may be an example of when separate property becomes marital property, at least in part. If a spouse owned a business before marriage, but the other spouse contributed to its growth through labor, financial support, or other means, that portion of the business’s increased value may be considered and subject to division. Of course, before spouses or courts divide a business, they must establish its value.
Methods of Business Valuation
One of three approaches is common when valuing a business in divorce.
- Income: Estimates future earnings and discounts them to present value. This is common for service-oriented or professional practices.
- Market: Compares the business to similar companies recently sold.
- Asset: Calculates the value of the business’s tangible and intangible assets, minus liabilities.
A professional business appraiser, often a CPA or forensic accountant, usually does an impartial valuation report. Both parties may end up getting their own experts if they disagree over the initial value of the business.
A divorce checklist helps with transparency. For example, financial statements, tax returns, balance sheets, and records of loans or distributions help with spousal negotiations and court decisions.
Options for Buying Out a Spouse’s Share of a Business
In Illinois, transportation and warehousing is the industry with the most small businesses, at about 183,942. In many cases, selling a company is not ideal, especially if it is a thriving operation or the family’s primary income source. Instead, one spouse may choose a business buyout during divorce to retain full ownership.
Lump-Sum Buyout
The most straightforward approach is for one spouse to pay the other a lump sum equal to the payor’s share of the business’s value. For instance, if the business is valued at $500,000 and both spouses own equal shares, one spouse could pay $250,000 to buy out the other’s interest. However, this option often requires liquid assets or financing, which not all parties have.
Structured Payout or Installments
The buying spouse agrees to pay the selling spouse over time, often with interest. This arrangement must be carefully drafted to protect both parties, especially to ensure continued payments even if the business faces temporary downturns.
Offsetting Other Marital Assets
Another common option is to offset the value of the business by one spouse getting a greater share of other marital property. For example, one spouse may keep the business while the other receives a larger portion of retirement funds, real estate, or investment accounts. This method is especially useful when dividing complex estates. It reduces the need for direct monetary transactions.
Partial Ownership or Silent Partnership
In rare cases, spouses may agree to continue sharing ownership post-divorce, such as when the business relies heavily on both parties’ skills. However, this arrangement can be emotionally challenging. It requires clear legal agreements on roles, profit distribution, and exit terms.
Considerations for Older Married Couples
For older married couples, dividing a business during divorce may raise retirement and succession planning issues. If both spouses are nearing retirement, they may prefer to sell the business entirely and divide the proceeds rather than continue managing it separately.
Dividing Business Assets: Steps and Considerations in an Illinois Divorce
Illinois is an equitable distribution state, meaning the court considers various factors, such as each spouse’s contribution, income, and future earning potential, when dividing a business.
- Identify all business interests: This includes corporations, partnerships, LLCs, professional practices, and related entities that may hide income or assets.
- Gather evidence and financial records to support the valuation process: Common documents include business tax returns (at least three years), profit and loss statements, partnership or shareholder agreements, payroll records, and loan or debt documentation.
- Work with professionals: A divorce lawyer often collaborates with accountants, appraisers, and tax experts.
- Negotiate or mediate: Many couples who own a business prefer to reach a settlement agreement rather than litigate. Mediation lets them maintain confidentiality about financial details and preserve the business’s operations.
Court Involvement, Taxes, and Going Forward
If the spouses cannot agree on how to divide a business in an Illinois divorce, the court decides on division. Of course, dividing or selling a business may create tax consequences. Asset transfers incident to divorce are typically non-taxable under federal law, but capital gains, depreciation recapture, or future business income can affect financial planning.
For spousal involvement post-division, clear boundaries are important. Noncompete agreements or confidentiality clauses may be appropriate. Business owners should update corporate records, operating agreements, and ownership filings to reflect arrangements after divorce.
The Rogoff Law Group can help spouses divide a business in an Illinois divorce. Contact us for assistance in Chicago or Des Plaines.
FAQs About Business Division in Illinois Divorce
How is a business valued during an Illinois divorce?
To value a business during a divorce, an appraiser typically uses a method such as income, market, or asset, analyzing financial documents and market conditions.
What are the common methods for buying out a spouse’s share of a business?
Common methods for buying out a spouse include a lump-sum buyout, structured payments over time, or offsetting the business’s value with other marital assets such as real estate or retirement accounts.
Can a court order a sale of the business to divide assets?
If neither spouse can buy out the other, or the business cannot be divided equitably, the court may order its sale and distribute the proceeds as part of the property division.
