In a divorce, if a spouse has an ownership interest in a closely held (family) business, the interest may be classified as marital property subject to equitable division, which could very well disrupt business operations.
- The business will have to undergo a business valuation as part of the division of marital assets process
- Because the business is a separate entity, it will likely be joined as a party to the lawsuit between the spouses
- If the business is deemed a marital asset, the Court may distribute the ownership interest to both spouses
- Alternatively, the Court may distribute ownership to the spouse who is more involved in the day to day operations of the business, but require a hefty payout to the spouse who is not
Even when a business is acquired by one spouse through a gift or inheritance, the other spouse may still hold a legal interest that must be addressed. For instance, any appreciation in the business’s value during the marriage may be considered a marital asset subject to division. Additionally, if the non-owner spouse contributed to the business—such as through direct employment—the court may award them a portion of the ownership interest.
Steps for Safeguarding Business Assets
An ounce of prevention is worth a pound of cure as the saying goes. To protect a closely held business, a prenuptial agreement is a good option for a spouse who owns a business prior to marriage, or executing a post nuptial marital agreement when starting a small business during the marriage or when one spouse is gifted or inherits a business. Of course the business can also modify the business governing documents to specify who may hold ownership interest in the business, as well as buy out provisions in the event of separation and divorce, but this would not altogether remove the business from consideration when dividing marital assets like a pre- or postnuptial agreement can.
Safeguarding Small Business Interests Through Prenuptial and Postnuptial Agreements
A prenuptial agreement is an enforceable contract signed before marriage that outlines asset division, including business interests, in the event of divorce or death. It is particularly effective for business owners entering marriage, allowing them to designate pre-marital business value and future appreciation as separate property. A postnuptial agreement serves a similar purpose but is executed after marriage and can address businesses started or grown during the marriage or for business interest gifted of inherited.
Pre and postnuptial agreements can:
- Classifying the business as the separate property of one spouse
- Protect against claims on appreciation due to marital efforts or indirect contributions (e.g., spousal support of the household)
- Specify control, management rights, and mechanisms like buyout formulas instead of ownership transfer, shielding the business from division, debt liability, or operational disruption
Key Requirements for a Valid and Enforceable Agreement
For the agreement to hold up in court, it generally must meet these key requirements:
Written and Properly Executed — Pre and postnuptial agreements are formal written documents prepared by an attorney, signed by both parties, often with notarization or witnesses
Full Financial Disclosure — both parties must provide complete, accurate information about assets, liabilities, income, and business valuations or risk invalidating the agreement. Business appraisals at the time of signing are recommended.
Voluntary Entry Without Duress — the agreement must be signed freely, without coercion, undue influence, or pressure. Independent legal counsel for each party is highly recommended and may be required to demonstrate fairness.
Fair and Reasonable Terms — Courts may scrutinize for unconscionability. Terms should not leave one spouse destitute. For businesses, this might include provisions for a lump-sum buyout or other compensation for the non-owner spouse.
Specificity Matters — Explicitly define the business (by name, entity type, ownership percentage) as separate property; include pre-marital value, active appreciation during marriage, and passive growth; include clause on ownership/control retention, profit distribution, access to records, and what happens upon divorce (e.g., buy-sell provisions or waivers of spousal claims); cover any related issues such as inheritance
Once an agreement is executed, it is vital to maintain a strict separation between business and personal finances to avoid commingling funds. Furthermore, business owners must adhere to the company’s operating agreement or buy-sell provisions. For owners of closely held businesses, a thoughtfully drafted prenuptial or postnuptial agreement provides long-term peace of mind and operational continuity. These agreements allow couples to enter or maintain a marriage with clear expectations while safeguarding the business that supports their family. Early planning with an experienced Illinois division of marital business asset attorney is essential to avoid problems later.
Secure Your Future with an Expert Property Division Lawyer
Whether you are navigating the complexities of a closely held business during a divorce or planning to protect your interests with a pre- or postnuptial agreement, contact the family law office of Ronald L. Bell & Associates. Call 847-495-6000 for immediate assistance.
