How Is Ownership of a Family Business Handled During a Divorce?

 Posted on November 22, 2021 in Divorce

A divorce will affect the finances of spouses in multiple ways. During the divorce process, spouses will need to identify all of the marital assets they own and determine how these assets will be divided. The property division process can become especially complex if either spouse owns a family business. Because a business may be one of the most valuable assets a couple owns, and it may serve as a source of income for one or both spouses, a couple will need to determine how ownership of a business will be handled going forward.

Options for Ownership of a Marital Business

A family business will be considered a marital asset if it was founded or acquired while a couple was married. If one spouse owned a business before getting married, it will usually be considered separate property. However, any increase in value for a non-marital business during a couple’s marriage may need to be addressed during the divorce process, especially if these increases may be partially attributed to efforts by the non-owner spouse or investments in the business using marital funds.

The monetary value of a business will need to be determined to ensure that it and other marital assets can be divided fairly. There are multiple methods that may be used during the business valuation process. The value of assets owned by the business may be calculated, and any business debts or liabilities may be subtracted. A valuation may also consider the income earned by the business over the past several years and the potential for growth in the near future. A couple may also consider other similar businesses that have been recently sold to estimate the potential purchase price of a family business.

Decisions about ownership of a family business may be based on each spouse’s level of involvement in the business and whether one spouse wishes to maintain sole ownership of the business going forward. If a spouse wishes to remain the sole owner of a business, property may be divided in a way that ensures that the other spouse will receive assets of the same value as the business, or one spouse may purchase the other spouse’s share of the business through a monetary payment or an ongoing payment plan. 

If both spouses have worked together to manage a family business, they may agree that they will continue to serve as business partners going forward. In these cases, it is a good idea to create a partnership agreement that defines each partner’s roles and responsibilities, which will ensure that a couple can own and manage a business effectively in the years to come. 

If it will not be possible to divide business assets fairly, or if other arrangements cannot be made, spouses may choose to sell a family business during the divorce process. They can then divide the profits earned from the sale alongside any other marital assets they own. In these cases, spouses will need to understand whether capital gains taxes will apply to the sale of a business.

Contact Our Oak Park Business Valuation Lawyer

If you or your spouse own a family business, the Law Office of Vincent C. Machroli, P.C. can help you determine the best ways to address ownership of business assets during your divorce. We will work with you to find solutions that will protect your financial interests and ensure that you can move on successfully once your divorce is complete. Contact our Hillside asset division attorney at 708-449-7404 to arrange a complimentary consultation.

Sources:

https://www.ilga.gov/legislation/ilcs/documents/075000050k503.htm

http://www.smbceo.com/2019/11/19/how-to-value-a-small-business-for-divorce/ 

http://www.smbceo.com/2019/11/19/how-to-value-a-small-business-for-divorce/