Division of assets in a divorce can be a difficult and contentious process under any circumstances. When there’s a business in the mix, the stakes are often higher and the process even more complicated.
The options for divorcing business owners vary depending on several factors, such as:
- Whether one party owned the business prior to the marriage
- How the business is structured and owned
- Whether there are outside owners of the business
- Whether there is a prenuptial agreement in effect
- Whether there is a buy-sell agreement
Even within a category, the answer may not be as simple as you expect. For instance, property owned by one party or another before the marriage is generally considered “separate property” in Illinois, meaning it’s not subject to division by the divorce court. Typically, if you bring a vintage Mustang to the marriage, the car stays with you. That’s true even if the value of the asset increases during the marriage. However, if the non-owner spouse contributes to the value of the non-marital property–whether monetarily or through his or her own efforts–the marital estate may be entitled to reimbursement for those contributions.
In other words, there’s a lot to consider.
In this post, I’m going to provide some general information about your options in one specific scenario: when you and your spouse co-own a business.
What Happens to a Co-Owned Business in Divorce?
Preserving the Business During Divorce
Even a simple divorce case typically takes at least a few months to resolve. A complex divorce involving a co-owned business will likely take much longer–often a year or more. That’s plenty of time for a business to go under if no one is minding the store, or if the parties are working at cross purposes rather than playing their usual roles in protecting and growing the business. If conflicts between divorcing spouses put the business at risk, it may be necessary to pursue temporary orders to protect the value of the asset while the case is in progress.
Dividing or Sharing a Business after Divorce
How a co-owned business is distributed in divorce depends in part on the goals of the parties. But, sometimes those goals are at odds. The general options for a divorcing couple who co-owns a business include:
- One party buying the other out or swapping other marital property for the spouse’s interest in the business. In this situation, one spouse transfers his or her interest in the business to the other in exchange for payment or an adjustment of the property settlement, and the receiving spouse continues to operate the business. If there isn’t enough available cash or marital property, this type of agreement can sometimes be structured as a percentage of profits for a certain time period or installment payments. But, it’s important to be realistic about whether one spouse or the other is likely to be able to operate successfully without the other, and what changes will be required to make the business viable without one of the principals.
- The parties continuing to operate the business together. Clearly, this won’t work for every divorcing couple that owns a business together. And, if you’re considering this option, it’s important to be brutally honest with yourself and your spouse in assessing how workable it is. However, some couples continue as co-owners, either each playing their traditional role in operations or with one as a more silent partner. Typically, if the couple does plan to move forward as business partners or co-owners of a business entity post-divorce, it will be necessary to create a more structured contractual relationship than they may have maintained during the marriage.
- Selling the business. If neither party wants to continue operating the business or a buy-out isn’t realistic, the parties may agree to sell the business and divide the proceeds as part of the property settlement agreement. Or, if there is no agreement, the court may order the sale of the business and divide the proceeds along with other assets.
Each of these options carries a separate set of issues and considerations. For example, a couple planning to continue business operations together will likely need a new and more formal operating agreement or other contract setting forth the rights and responsibilities of each, how profits are to be distributed or the parties are otherwise to be compensated, and what happens if one decides to leave the business. If one party is to buy the other out or the business is to be sold, the parties will have to agree on valuation or present expert witnesses to help the court value the business in a contested proceeding.
If you own a business, it’s a good idea to get legal advice before you take steps toward divorce. Or, if your spouse has filed, as soon as possible after you’re served. A consultation with one of our experienced complex divorce attorneys is a great place to start.