Your small business is vulnerable. Not necessarily to theft, or natural disasters, or even economic downturns. Instead, your small business is vulnerable to domestic instability and to divorce. On a personal level, a divorce is likely to distract a business owner and consume valuable time. Legally, there are many scenarios where a small business will be considered an asset in the marital estate and subject to division. The repercussions of this can be broad; but first, let’s bring the issue into context.
The Importance Of Small Businesses
There are 5,885,784 companies in this country that have at least one employee. Of those, 65% have fewer than ten employees and that doesn’t even include the 19,523,741 non-employer companies. Small businesses of twenty or fewer employees now comprise half of this country’s non-farm GDP. Small businesses support the livelihoods of their owners and employees and are very much an engine of growth in the United States. While we have written this article for the small business owner, the impact of divorce on small businesses has more far-reaching repercussions.
Who Owns the Business In A Divorce?
When a couple gets divorced, everything they own will fall into one of three categories, legally referred to as ‘estates.’ Property will be categorized as belonging to the husband’s ‘non-marital estate,’ the wife’s ‘non-marital estate,’ or to the couple’s ‘marital estate.’
Unless you are a practicing family law attorney, you are probably not well-versed in the language of the Illinois Marriage and Dissolution of Marriage Act. It’s important to know that Section 503 of the Act addresses the identification and distribution of marital property. Specifically, marital property means “all property acquired by either spouse subsequent to the marriage,” with a few specific exceptions which we do not need to address here. When a marriage is dissolved, marital property is divided between the spouses according to a list of factors, including but not limited to: the contribution of each spouse to the marriage; the duration of the marriage; custodial provisions for any child or children; the value of the property assigned to each spouse; and the reasonable opportunity of each spouse for future acquisition of capital assets and income.
A small business owner must address a variety of problems when facing a divorce. First and foremost, it is possible that a court could find the small business to be marital property. Where one spouse starts his or her business during the marriage, a court may find that his or her business is a product of the marriage, meaning it arose and flourished as a product of spousal support. This is especially true where one spouse makes lifestyle decisions to assist the other spouse with his or her business, such as becoming a stay-at-home parent or contributing money from the couple’s joint bank account.
Even businesses that began prior to the marriage may be found to be marital property. A court will consider the contribution the spouse made to business during the marriage and the sacrifices the non-owning spouse made to further the marital relationship. A court may be more likely to find that a business became marital property if the couple were married for an extended period of time and if the non-owning spouse made sacrifices to ensure the survival of the business.
Family businesses add another layer of complexity. Where a family business that existed prior to the marriage is handed down to a married son or daughter through a restrictive stock transfer or other form of conveyance, that transfer or conveyance during the marriage would likely be treated as a gift to the marital estate. That gift to the marital estate may be subject to division upon dissolution. It is important to note that determining ownership of a gift is a complex process unto itself.
Small Businesses and Maintenance Obligations
Regardless of whether the non-owning spouse acquires an interest in the business, he or she may be entitled to maintenance. The court considers a variety of factors when determining a maintenance award. These factors include the duration of the marriage, the standard of living the couple enjoyed while married, the needs of each party, and any other factor the court deems appropriate. A business owner may find himself or herself obligated to pay his or her spouse maintenance. Where the business owner’s only source of income is from his or her business, maintenance payments may place a strain on a business, harming its cash flow and bottom line.
Collaborative Divorce Can Protect Your Small Business
The worst case scenario for any business owner is divorce litigation. Litigation is costly, time consuming, and emotionally draining. The decisions of business value and division of assets will be decided by the judge. Ultimately, litigation adds an element of uncertainty to an already stressful period. Not to mention the fact that there is a serious risk to productivity of the business owning spouse during this highly stressful period of the divorce litigation.
The more advantageous dispute resolution process is collaborative divorce. While we have discussed the benefits of collaborative divorce in detail on our practice areas page and on our blog, it is worth emphasizing that the Collaborative Law Process offers unique benefits to business owners.
Mutually Agreed Upon Financial Neutrals
In the event that a divorce becomes litigated, each spouse will have the right to his or her own business valuation. The cost of a business valuation will vary depending on the size of the business and the amount of work involved in the valuation. Courts will consider business valuations in determining the division of marital assets between spouses and the ability to pay, or need to receive, maintenance and/or child support. Further, if that the court determines both spouses have an ownership interest in the business, the business value will play an important role in any distribution of marital assets or buyout offers between spouses, assuming that the parties settle before trial.
That business valuation will be conducted by independent experts. This process may be intrusive and disruptive to the business itself, to say nothing about what the expert might value the business at. It is very likely that the experts will produce different business values. Any difference between the two values will be argued in court. This process is inherently risky and it is unlikely that both spouses will be happy with the judge’s final ruling.
In a Collaborative divorce, the parties and their Collaboratively trained attorneys will select a mutually agreed upon financial neutral trained in, and committed to, the Collaborative Law Process. The financial neutral will not work for any one party but will instead be focused on a result that is in the best interests of the family and the marital estate. Each party will have an opportunity to discuss their needs and interests with the financial neutral. However, since the financial neutral does not work for any one party, he or she is unlikely to be influenced by any one party’s opinion. Depending on the size of the business, the collaboratively trained financial neutral may facilitate the choice of a joint expert to value the business. The result is a more trustworthy business valuation without the risks associated with litigation. Additionally, by reducing the number of experts that must be hired, the couple will be able to save more money, and the business will be less likely to be subject to disruption.
Collaborative Divorce Affords The Parties More Scheduling Flexibility
Running a small business, or being the key person in a small business, is a time consuming task. The Collaborative Law Process allows for flexibility to address unique personal concerns, such as scheduling meetings around business obligations. Frequent trips to court can easily disrupt the small business person’s ability to manage his or her business. Further, in the event that divorce litigation proceedings become hostile, it is possible that the non-owning spouse may seek to harass or annoy the owning-spouse with aggressive litigation tactics. The Collaborative Law Process will allow the parties to work together and prevent litigation tactics and other maneuvers from interfering with or destroying the small business.
Collaborative Divorce Can Produce A Business-Friendly Marital Settlement Agreement
Collaborative divorce fosters a spirit of cooperation and assists the parties in forming a sustainable and mutually-acceptable marital settlement agreement. This is especially relevant when a small business is involved. The parties may be able to agree to structure maintenance payments around cash flow cycles and schedule parenting time to avoid conflicts with business obligations. Collaborative divorce is about focusing on the needs and interests of the parties and their children. In most scenarios, the health and success of a small business is directly correlated with the stability and success of the parties, and, where relevant, their children. It is in the best interests of both parties not to let a judge decide how their small business should be carved up, but to resolve the relevant issues themselves with the benefit of the Collaborative Law Process.