How Illinois Courts Treat LLCs, Startups, and Sole Proprietorships in Divorce
Small businesses account for about 44.1% of the state’s total employment. Whether a business is a limited liability company, startup, or sole proprietorship, it may be subject to division if it is marital property.
When Is a Business Marital Property?
One consideration is when and how the business started. It is more likely to be marital property if it was founded during the marriage using marital funds or with the support of the spouse. Even an increase in the value of a business started before the marriage could be marital property.
Take an LLC formed before marriage, with your spouse contributing unpaid labor or strategic support. Courts also consider indirect contributions. If the nonowner spouse handled child-rearing or other responsibilities that let the entrepreneur focus on the company, the court may view that as a meaningful contribution to the marital estate. The underlying ownership of the business might remain separate, but the nonowner spouse could get a share of the increase in the LLC’s value during the marriage.
Meanwhile, if someone forms a business during a marriage, Illinois law generally presumes it to be a marital asset. This is even if the owner’s spouse had no direct involvement.
What About Business Debts and Liabilities?
Business liabilities may also be subject to equitable distribution. Courts examine who benefited from the debts and why they were incurred.
What About LLC-Specific Considerations?
Protecting LLC ownership in Illinois divorce cases is an issue with nuances. A spouse who does not have voting rights or operational control may still get part of the business’s value in a divorce.
To reduce LLC risks, founders should have a well-drafted operating agreement that addresses ownership changes during divorce or a buy-sell agreement with provisions triggered by divorce. Documents proving separate contributions are important, too.
When Can a Spouse Claim a Share of Business Growth or Revenue?
Spouse claims on business revenue during divorce can be confusing. For example, even if a spouse does not co-own the business, the law may entitle him or her to a portion of its increased value or profits.
Treatment of Business Income
Business income can be a factor in how spousal support is calculated. If the business income is irregular or difficult to predict, courts may look at prior years’ tax returns or average earnings.
Business income may factor into asset division. If you pay yourself a salary, that is income. If you reinvest profits into the business or keep them in some form, your spouse might say those are marital earnings and ask for a share. Courts consider:
- If the owner spouse used business income to support the family
- If any earnings the owner kept increased marital wealth
- If the nonowner spouse contributed directly or indirectly to the success of the business
In a common scenario, a spouse who stayed home with the children says that doing so allowed the business owner to work longer hours. The nonowner spouse may claim that he or she enabled the business success and that the growth should be shared.
Valuing the Business
Spouses and the court in Glencoe need to know what a business is worth before it can be divided. A business valuation expert can assess tangible and intangible assets, cash flow and income, market comparisons and goodwill, and the owner’s compensation.
Valuation can be tricky with startups or small businesses with fluctuating earnings. However, it is necessary for figuring out a spouse’s portion.
Common-Law Marriage and Business Ownership
Illinois does not recognize new common-law marriages. However, your rights when terminating common law marriage from another state could affect your business if your partner tries to claim spousal rights to it. In these cases, the court may assess whether the relationship qualifies under another state’s laws.
Why Founders in High-Asset Divorces Should Hire a Divorce Lawyer
Entrepreneurs in high-asset divorces often face additional complications, for example, company shares, deferred compensation, equity stakes, intellectual property, and investor expectations. A divorce lawyer can proactively reduce the risks.
Lawyers can help with setting up trusts or holding companies that shield a business from being classified as personal marital property. Lawyers can assist with buy-sell agreements, which are common in multi-founder companies. These agreements limit how and when founders can transfer shares. Meanwhile, a marital settlement agreement can establish who gets what without court intervention.
If you are already facing a divorce, your attorney can help safeguard your business, perhaps contesting valuation methods that overstate your business’s worth, arguing for fair spousal support, and negotiating settlements that let you keep full control of your company.
Best Practices to Protect a Glencoe Business Before Divorce
Some of the best ways to protect your business include:
- Separate business and personal finances
- Reasonable salary
- No spouse co-signer for business documents unless necessary
- Detailed financial records and business tax filings
- Operating agreement that considers divorce scenarios
What happens when your spouse won’t sign divorce papers? The divorce usually can still proceed, with a default judgment being possible if your spouse has proper notice.
However, the process could become longer. Avoid mixing personal and business assets during divorce, limit selling business assets and taking on new debt, and consult professionals before agreeing to new business terms. Judges may view questionable financial behavior during divorce as evidence of bad faith or attempts to hide assets. Contact us today at Silberman Law Group to learn more about how to safeguard a business in a divorce.
