How Is Property Divided in a Divorce When One Spouse Owns a Business?
Dividing property during a divorce can be a complicated and emotionally charged process, especially when one spouse owns a business.
Unlike more straightforward assets like bank accounts or real estate, a business may involve intricate valuations, ownership rights, and future earning potential, all of which must be carefully considered during the division of marital property.
Here, our Chicago divorce attorney at The Law Office of Alyease Jones will go over how courts typically handle business ownership in divorce proceedings and what options exist for fairly dividing or offsetting its worth.
Is the Business Marital or Separate Property?
One of the first questions in dividing a business during a divorce is whether it’s considered marital property (subject to division) or separate property (belonging solely to one spouse).
Generally, a business started before the marriage may be seen as separate property, but this can change depending on how it was handled during the marriage. For example, if both spouses contributed to the business—through labor, finances, or strategic decisions—it may be classified as marital.
Courts will also consider if marital funds were used to support or grow the business. Knowing how your state defines and treats these categories is essential, as rules vary widely.
Illinois Law and Equitable Distribution
In Illinois, property division during a divorce follows the principle of equitable distribution, not community property. This means that marital property, including a business, if it's deemed marital, will be divided fairly, though not necessarily equally.
The court considers several factors when determining what’s equitable, such as the length of the marriage, each spouse’s financial situation, their contributions to the acquisition and growth of the business, and any prenuptial or postnuptial agreements.
It's also important to note that Illinois distinguishes between marital and non-marital property, and only marital assets are subject to division. Working with an experienced divorce attorney can help make sure your business interests are properly classified and protected under Illinois law.
Valuing the Business
Before any division can occur, the business must be accurately valued. This typically involves a professional business valuation, which may be conducted using methods such as income-based, asset-based, or market-based approaches.
Valuation considers tangible assets like inventory and equipment, as well as intangible assets such as goodwill and brand reputation. Disagreements often arise during this stage, as each spouse may hire their own party, potentially resulting in differing valuations.
The court may then decide which valuation to accept or appoint a neutral party to provide an independent analysis.
Options for Dividing the Business Interest
Once the business is valued, the court or divorcing parties must determine how to divide it in a way that is fair and practical. The appropriate approach depends on the financial circumstances of each spouse, the nature of the business, and whether both parties wish to remain involved.
Some of the most common options for dividing a business in a divorce include:
Buyout by one spouse: One spouse purchases the other’s share, allowing the business to continue under single ownership.
Sell the business and split the proceeds: The business is sold to a third party, and the profits are divided according to the divorce settlement.
Co-ownership post-divorce: In rare cases, both spouses continue to jointly own and operate the business, usually with clear terms outlined in a settlement agreement.
Each option comes with its own legal, financial, and emotional considerations, making it important to consult a family law attorney during the decision-making process.
Common Challenges in Business Division
Dividing a business isn’t just about numbers. It often involves legal, emotional, and financial challenges. Some of these common challenges include:
Disputes over classification: Whether the business is marital or separate property can be highly contested. If the business was started before the marriage but grew substantially during it, both spouses may feel entitled to a share. Courts must examine financial records, contributions, and any commingling of assets to make this determination.
Hidden or undervalued assets: One spouse may try to downplay the business's worth to reduce the payout. This can involve underreporting income, inflating debts, or hiding revenue streams. A forensic accountant is often needed to uncover the true value and assure a fair settlement.
Cash flow and liquidity issues: A business may have value but lack the cash to fund a buyout. Selling the business may not be practical or desirable, especially if it’s a primary source of income. Creative solutions like structured payments or trading other marital assets are often required.
Emotional attachment: The owning spouse may have built the business from the ground up, making negotiations personal and tense. Letting go of partial ownership can feel like losing a part of one’s identity. These emotions can complicate objective decision-making and prolong the process.
Future earnings potential: Estimating long-term income and growth adds another type of complication. Market conditions, industry trends, and the owner's continued involvement all influence future value. Courts must often rely on projections, which can vary significantly.
Being aware of these issues can help both spouses prepare for negotiations and protect their interests. Consulting a skilled divorce attorney early in the process can also provide critical guidance and help avoid costly mistakes.
What Happens When Both Spouses Are Involved in the Business?
When both spouses play an active role in the business, division becomes even more nuanced and legally complicated. Ownership stakes, job roles, financial contributions, and the personal effort each spouse put into building and operating the company must all be taken into account.
Courts will evaluate whether one spouse had a more dominant role, such as managing day-to-day operations or making key strategic decisions, or if both were equally involved in the business’s growth and success.
If both parties are essential to the continued functioning of the business, courts may explore creative solutions. These can include structured buyouts where one spouse purchases the other’s share over time, or short-term co-ownership agreements that allow the business to continue operating during a transition period.
In rare cases, former spouses may continue to co-own and operate the business, especially if they are able to maintain a professional working relationship.
However, emotional dynamics, differing visions for the company, and the stress of divorce can make long-term co-ownership impractical or even damaging to the business.
That’s why it’s critical to have clearly defined exit strategies, operational agreements, and legal protections in place, ideally created during the settlement process. Having a neutral business mediator or divorce attorney involved can also help facilitate these discussions and reduce potential conflict.
How Prenuptial or Postnuptial Agreements Affect Business Division
Prenuptial and postnuptial agreements can significantly impact how a business is treated in a divorce. These legal contracts often specify which assets are considered separate and how property, including business interests, should be divided if the marriage ends.
If a business was clearly designated as separate property in such an agreement, and the terms are legally valid, courts will usually uphold it.
However, these agreements must meet specific legal standards, such as full financial disclosure and fair terms at the time of signing, to be enforceable. An experienced divorce attorney can help evaluate the strength of the agreement and make sure your business interests are adequately protected.
Contact Our Experienced Lawyer
If you or your spouse owns a business and you're in the process of getting a divorce, be sure to reach out to The Law Office of Alyease Jones. We serve clients in Chicago, Illinois, and throughout the state. Contact us today to schedule a consultation.