Divorcing a Business Owner in Illinois: What Happens to the Business? can be a much more complicated question than deciding who keeps a house or how a bank account should be divided. A closely held business may represent income, years of work, family wealth, and one spouse’s future livelihood all at the same time.
Whether the relevant asset is an LLC membership interest, corporate shares, a partnership interest, professional-practice interest, farm-business interest, or sole-proprietorship assets, an Illinois divorce may require the parties to determine whether the business interest, ownership interest, or business assets are marital or non-marital property, what the ownership interest or business assets are worth, and how their value should be addressed without unnecessarily disrupting the company.
For business owners and their spouses, understanding those issues early can make a significant difference.
Is the Business Interest Marital or Non-Marital Property?
The first question is usually not, “Who gets the business?” It is how the relevant ownership interest or business assets should be classified.
Under the Illinois Marriage and Dissolution of Marriage Act, property acquired by either spouse after the marriage and before a divorce judgment is generally presumed to be marital property unless a statutory exception applies. Property acquired before marriage, certain gifts and inheritances, and property excluded by a valid premarital or postnuptial agreement may qualify as non-marital property.
That distinction can become complicated with a business.
For example, one spouse may have owned an LLC interest before marriage but continued building the company throughout a 20-year marriage. Another couple might have started a business together after getting married. In another situation, one spouse may have inherited an interest in a family company.
The date the business interest was acquired is important, but it may not answer every question by itself.
A Business Interest Owned Before Marriage Can Still Raise Divorce Issues
A premarital ownership interest may be non-marital property, but that does not necessarily mean there will be nothing to evaluate during divorce.
Illinois law recognizes that marital and non-marital estates can make contributions to one another. When a spouse contributes personal effort to non-marital property, reimbursement may become an issue if the effort was significant and resulted in substantial appreciation, subject to the statutory requirements governing reimbursement, traceability, substantial appreciation, and whether the marital estate was reasonably compensated.
That means the details matter.
Was marital money invested in the company? Did one spouse contribute substantial personal effort? Was that effort reasonably compensated? Were business and personal funds mixed? Were loans paid with marital funds? Were ownership interests transferred during the marriage?
Good accounting and ownership records can become extremely important when answering those questions.
How Is a Business Interest Valued in an Illinois Divorce?
A privately held ownership interest does not come with a publicly quoted stock price, so valuation can become one of the most contested parts of a divorce.
Illinois courts generally determine fair market value based on the evidence presented. Section 503 provides that property may generally be valued as of the trial date or another date agreed upon by the parties or ordered by the court within its discretion.
Depending on the business, a valuation may involve reviewing:
- Tax returns and financial statements
- Revenue and profitability
- Assets and liabilities
- Accounts receivable
- Equipment and real estate
- Debt
- Owner compensation
- Cash flow
- Customer concentration
- Contracts
- Ownership restrictions
- Goodwill
- Transferability
- Any appropriate valuation discounts
- The company’s history and future prospects
A qualified valuation professional may be important when a business interest represents a substantial portion of the marital estate or when the parties disagree significantly about its value.
Goodwill Can Affect the Valuation
Depending on the type of business, valuation may also require analysis of goodwill.
Illinois distinguishes between enterprise goodwill and personal or professional goodwill. Enterprise goodwill is associated with the business as an ongoing enterprise and can exist independently of a particular owner. Personal goodwill, by contrast, is tied primarily to an individual’s reputation, skills, relationships, or future earning capacity.
Illinois courts have cautioned against counting personal goodwill twice, once as part of the divisible value of a business and again through factors such as future earning capacity, maintenance, or property division. Enterprise goodwill that would continue independently of the owner may be treated differently and may form part of the business’s value.
This distinction can be particularly important for professional practices, closely held companies, and businesses that depend heavily on one owner’s personal relationships or reputation.
Does the Other Spouse Automatically Get Half of the Business?
No.
Illinois divides marital property in “just proportions” after considering statutory factors. It is not an automatic 50/50 property-division system. Relevant considerations include each spouse’s contributions, the value of property assigned to each spouse, the duration of the marriage, the parties’ economic circumstances, income and earning opportunities, agreements between the spouses, and tax consequences.
There is also an important distinction between allocating the value of an ownership interest and literally making former spouses’ co-owners of an operating company.
Depending on the circumstances, one spouse may retain the business interest while the other receives different marital assets or another financial offset. The appropriate result depends on the overall marital estate, the entity structure, governing agreements, and the facts of the case.
Business Income May Need a Closer Look
Business ownership creates another issue that salaried employment may not present: determining the owner’s income for support purposes.
For purposes of calculating child support, Illinois defines net business income as gross receipts minus ordinary and necessary expenses required to carry on the trade or business. The statute specifically addresses sole proprietorships, closely held corporations, partnerships, flow-through entities, and self-employment. It also addresses inappropriate or excessive expenses and significant business-provided benefits that reduce a parent’s personal expenses.
This statutory formula applies specifically to child-support calculations. Business records may also be relevant to maintenance, but maintenance and business valuation involve separate analyses and may consider different factors.
Illinois law also provides that income may be imputed for child-support purposes only after an evidentiary hearing or by agreement of the parties, with specific written findings identifying the basis for the imputation.
Be Careful With Unusual Business Transactions During Divorce
When someone anticipates divorce, the instinct may be to move money, change compensation, transfer ownership interests, take on new debt, or restructure the company.
Those actions may create disclosure, dissipation, valuation, or credibility issues, particularly when they fall outside the ordinary course of business or reduce the value available for division.
After a dissolution proceeding begins, either party may seek temporary injunctive relief. Upon a proper request and factual showing, an Illinois court may restrain the transfer, concealment, encumbrance, or disposition of property, subject to statutory provisions concerning ordinary business activity, necessities of life, and necessary business expenses. It is not an automatic freeze merely because a divorce has been filed.
Normal business operations still need to continue. Unusual transactions, however, should be carefully documented and discussed with counsel before they occur.
Business Agreements Can Matter Before Divorce Happens
Operating agreements, shareholder agreements, partnership agreements, and buy-sell agreements may contain provisions affecting transfers, ownership, valuation, or what happens when an owner experiences a major life event.
A valid prenuptial or postnuptial agreement may also address property rights and the treatment of a business interest in the event of divorce.
These documents should be reviewed together rather than assuming that one agreement automatically controls every aspect of the divorce.
For business owners who are not currently facing divorce, coordinating business planning, succession planning, and marital planning before a conflict arises can help create greater clarity later.
Frequently Asked Questions About Businesses and Illinois Divorce
If I started my business before marriage, is it automatically protected?
Not necessarily. A premarital business or ownership interest may qualify as non-marital property, but contributions, transfers, commingling, tracing, compensation, and potential reimbursement claims can affect the analysis.
Can my spouse become an owner of my company after divorce?
Not automatically. How an ownership interest is handled depends on its classification, the entity’s governing documents, the overall marital estate, and either the parties’ settlement or the court’s property allocation.
Can an Illinois court order the sale of a business or business interest?
Section 503 permits an Illinois court to order the sale of marital property when appropriate. That does not mean an operating company or ownership interest will routinely be sold. The practical result depends on the entity structure, governing documents, valuation, available marital assets, and the overall property allocation.
Do I need a business valuation during divorce?
Not in every case. However, when a closely held business or ownership interest has substantial value or the spouses disagree about what it is worth, a professional valuation may be important.
Protect the Business While Addressing the Divorce
A divorce involving a business requires looking at more than the company name on a tax return. Classification, valuation, goodwill, income, compensation, taxes, marital contributions, ownership documents, and the future operation of the company may all need to be considered together.
Rincker Law, PLLC assists Illinois clients with divorce, business law, farm and family-business matters, and legal issues involving closely held companies and other significant assets.
If you own a business or are divorcing someone who does and need to understand how the business interest or assets may be treated in an Illinois divorce, contact Rincker Law, PLLC at (217) 774-1373 to discuss your situation.
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, or financial advice. The classification, valuation, and division of a business interest or business assets in an Illinois divorce depend on the specific facts and circumstances of the case. Reading this article does not create an attorney-client relationship.