How a Divorce May Affect Non-Marital Business Ownership Under Illinois Law

One thing that occasionally complicates a divorce is when a spouse has an ownership interest in a non-marital business.  Countless hours of hard work have gone into the business, there are stocks and ownership interests involved, or perhaps one spouse has control over the business and the other has none.  There are several important situations to consider when you are going through a divorce and business ownership is involved.  Some of these important implications are addressed below.

business divorce

Contribution and Reimbursement

All property that is acquired by either spouse during a marriage is presumed to be marital property.  This includes income generated during the marriage, even if the income is generated from working at a non-marital business.  For example, if a husband is working at his non-marital business and paying himself a salary of $100,000 per year, his salary is marital property.

 

When a spouse contributes personal effort during a marriage to non-marital property, such as a non-marital business, the efforts may also be deemed a contribution from the marital estate to the non-marital property.  The value of these efforts and contributions, if in the form of retained earnings or assets, can be subject to reimbursement to the marital estate, particularly if the contributing spouse has not been reasonably compensated.  So, if your spouse is paying him or herself a $50,000 salary, but the reasonable salary for the work he or she does is $100,000, the marital estate has a reimbursement claim for the difference.

 

Finally, it is important to note that only the appreciation of non-marital property resulting from significant personal efforts of the spouse are subject to reimbursement to the marital estate.  This means, for instance, that if one spouse has $100,000 in an investment account before the marriage, and at the time of divorce the account is worth $200,000 due solely to favorable market conditions, the marital estate is not entitled to $100,000 reimbursement even though the appreciation occurred during the marriage.

Retained Earnings and Profits

Retained earnings are generally considered net income of a corporation because they are used for the payment of dividends, wages, salaries, bonuses, and other corporate expenses.  Retained earnings ultimately add value to a business and remain a corporate asset until, for example, a bonus is paid out to the spouse that owns the business, at which point they become marital property.

 

Generally, retained earnings and profits of a corporation in which a spouse has an ownership interest remain the corporation’s property, and are not considered income to a spouse until severed from the other corporate assets and distributed.  However, retained earnings and profits of a non-marital corporation may be considered marital if the spouse has control over the decision to disburse the retained earnings.  To determine whether retained earnings and profits are a corporate asset or income of the spouse, Illinois courts often assess the nature and extent of shareholder control, and to what extent the retained earnings and profits are considered in the value of the corporation.  In re Marriage of Joynt, 375 Ill. App. 3d 817 (3d Dist. 2007).  Several cases in Illinois have addressed such situations, a few of which are summarized below.

 

  1. In re Marriage of Joynt (3d Dist. 2007):  Husband served as company’s president and owned 33% of the corporate stock.  His sister owned 19.4%, and his father owned 47.6% of the remaining shares.  Husband did not have authority to declare dividends or distribute retained earnings without approval from the remaining shareholders.  The court therefore held that the retained earnings were a non-marital asset.

 

  1. In re Marriage of Lundahl (2d Dist. 2009): Husband was the sole owner and shareholder of a non-marital business, and could unilaterally declare or withhold dividends and disburse profits.  Additionally, the retained earnings were not held by the corporation to pay expenses.  Therefore, the court held that the retained earnings constituted husband’s income and were marital property, rather than an asset of the non-marital corporation.

 

  1. In re Marriage of Steel (2d Dist. 2011): Husband owned 50% of company’s stock, was the CEO, and was chairman of the board.  The officers utilized an account through which they could take personal advances from the company, like a line of credit.  All loans had to be repaid to the corporation, and this account was secured by the company’s retained earnings account.  The court held that the company’s retained earnings are not income to the husband, and are therefore an asset of the non-marital business.

 

Ultimately, there are several ways in which business ownership may affect a divorce proceeding, and this can prove to be complicated issue.  For more information, please contact us.