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Owning a small business comes with many perks when compared to working for someone else. You set the schedule, make the big decisions, and reap the majority of the rewards. There are obvious downsides as well—statistically high likelihood of failure, more working hours, extra stress, and no health insurance to name just a few that most people can come up with off the tops of their heads. Yet, few people truly understand the full complexity of small business ownership until they go through a divorce. If you own a small business, your spouse, who may have nothing to do with that business, may be able to claim partial ownership during a divorce. When you own a business together, things get even more complicated.
Illinois divides marital property through equitable division. Marital property is anything acquired during the course of the marriage, including income, bank accounts, stocks, 401(k) accounts, pensions, real property, automobiles, furniture, and virtually every other type of asset or debt. This includes businesses. Property owned by each party before marriage remains nonmarital property. However, if you or your spouse owned a business before marriage and the other spouse became a co-owner, or contributed to the business through labor, or contributed to it with funding, it too will be considered marital property even though it was owned by one party before the marriage began.
For spouses who started up a small business together during marriage, dividing that business without ruining it can be complicated and in many cases, neither spouse has a desire to continue operating the business with the other. As such, the best option may be to give sole ownership to one spouse while the other gets the house, for example. In the best-case scenario, one spouse will be inclined to a buyout. In more complicated cases, neither spouse wants to give up their ownership of the business, and additional compromises will eventually have to be made either through mediation or in a courtroom, ordered by a judge.
The first step in dividing a small business is determining the value of it. According to some experts, businesses should sell for between two and three times the annual earnings. If a business brings in $200,000 per year, that would equate to $400,000 to $600,000. If split evenly, a spouse who gives up their ownership could theoretically walk away with $200,000 to $300,000, though not necessarily. While one party works to show how valuable the business is, the other — the spouse who plans on keeping the business — is doing everything in their power to prove otherwise. And, of course, there are many other factors that determine a business's worth, including how long it has been around, cash flow, expenses, and more. A business that just got off the ground has a 20 percent chance of failure by the end of the first year and a 50 percent chance of failure by the fifth year.
Whether you own a business jointly with your spouse or you or they are the sole business owners, you need to talk to a divorce attorney about asset division. Contact the skilled DuPage County divorce attorneys at the Law Office of Martoccio & Martoccio today at 630-920-8855 for a free consultation.