How Is a Family Business Divided During Divorce?

The Law Offices of Van A. Schwab April 15, 2020

The two most vital consequences during divorce are determining custody arrangements for young children and receiving an equitable distribution of marital assets.

For high-asset couples, determining what’s fair can be a complicated process, especially when a family-owned business is one of the assets. When a marriage ends, each spouse must determine what, if any, involvement they want in the company after the divorce.

The Most Common Ways for Dividing Family Businesses

The first step for dividing the company is establishing the company’s value through an unbiased third-party appraiser. Once that figure is known, there are three likely options for couples, including:

  • One spouse keeps the company: This is the most common method where the person who has been running the business buys out the other spouse’s interest based on the appraised value. It’s seen as a tax-efficient method since the direct transfer of shares isn’t taxable in most cases. When the purchasing spouse doesn’t have enough capital to buy it outright, a settlement note can be drafted to pay it off over time.

  • Both spouses remain owners: Often, spouses who have been intimately involved in creating and running the business both want to stay involved. While spouses who still get along can make it work, many couples find it too difficult to end their marriage but remain business partners.

  • Both spouses sell: For divorcing couples who each want a fresh start or those near retirement, this is a straightforward approach where the business is sold, and the spouses share the proceeds. However, selling a business can significantly prolong the divorce process, which can be challenging for those undergoing a contentious split.

Take a Businesslike Approach to Dividing Marital Assets

The emotional involvement of the company and the spouses’ ability to work together are critical factors in determining whether one, both, or neither will stay connected to a family business, and there is no one-size-fits-all solution. An experienced family law attorney here in Illinois understands the complicated steps involved in dividing a family business and can help you determine which option can lead to the best outcome.