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Does Your Spouse Share Your Business Debt in Divorce?The division of properties and debts is one of the main tasks when making a divorce agreement. You may know that a business that one of you owns can be marital property if it was started during your marriage, increased in value during your marriage, or mingled with your personal assets. When a business is a marital property, does that mean that the business’s debts are also marital debts? There are situations in which a business debt could be divided between spouses in a divorce:

  1. Your Spouse Cosigned on a Loan: Your spouse clearly shares liability for a business loan if they agreed to do so by cosigning the loan agreement. Your spouse may cosign if they are a partner in your business or if you need to back the loan with your personal finances in order to qualify. As long as your spouse’s name is on the loan contract, the lender will consider them liable for the debt, regardless of whether you decide to divorce.
  2. Your Business Does Not Have Limited Liability: The sole proprietor or general partner of a business is personally liable for their business’s debts unless they form the business into a corporation or limited liability company (LLC). Business debts that you are personally liable for will qualify as marital debts in a divorce. You may be expected to take responsibility for paying your business’s debt, but it will be included when calculating how to fairly divide all of your marital debts.
  3. You Used Your Business to Receive a Loan for Personal Expenses: A business owner may use their marital assets as collateral to get a business loan. The reverse can also work if you use business assets as collateral for a loan that is meant for personal expenses. For instance, you could use real estate that your business owns as collateral in order to receive a loan to pay for a home renovation project. Though the loan may appear to be a business debt, you can argue that your spouse should share responsibility for paying it because the loan was invested into a marital property.

Contact a DuPage County Divorce Attorney

Whenever you mix business and personal finances, it is important to keep track of where assets came from and how they are used. Otherwise, your spouse can claim ownership rights to business assets or avoid liability for shared debts. A Naperville, Illinois, divorce lawyer at Calabrese Associates, P.C., will work with you to protect your business interests. Schedule a consultation by calling 630-393-3111.

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How to Shield Your Business From a Potential DivorceThere can be a fine line between financial success and failure when running a business. A young business may not be able to survive an unexpected loss of revenue, and even an established business may suffer a setback. Most owners do not consider divorce when guarding their business against risks, but your business will get caught up in your divorce if the business is marital property. You may be forced to choose between giving up part of your business to your spouse or paying them off with other assets. By planning ahead, you may be able to protect your business from the division of property.

Prenuptial Agreement

If you started your business before you got married, you can use a prenuptial agreement to say that your business would not be marital property in the event of a divorce. The agreement could further specify:

  • Which parts of the business are marital and nonmarital
  • Whether your spouse would receive a portion of the amount that your business increased in value during your marriage
  • That you would have complete ownership of the business in case your spouse becomes a co-owner

You can create a postnuptial agreement instead of a prenuptial agreement if you have already married or you started the business after you married. In order for your agreement to be valid, you cannot coerce your spouse into signing it or withhold vital information.

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How Divorce Can Change a Family-Owned BusinessMarriage is an equal partnership in which spouses share their assets and responsibility towards their family. For some spouses, their relationship extends to a business partnership. It is common for spouses to help each other run a small family business, with one spouse often serving as the primary owner and manager. In less common situations, the spouses may be equal business partners who were both instrumental in creating and growing the business. If spouses in a business partnership decide to divorce, they must decide how they will continue to run the business afterward.

Your Options

Your business is a marital property that you must include as part of your division of property. You have four options for what to do with your business during the divorce:

  • One of you can pay the other in exchange for complete ownership of the business.
  • You can continue your existing business relationship despite your divorce.
  • You can divide the business between each other and create separate businesses.
  • You can sell the business and divide the proceeds.

Some of these options may be impractical for you, depending on your circumstances. You should consider continuing to be co-owners only if you believe you can put your personal differences aside in order to make business decisions. Splitting into two businesses will make each of your businesses weaker and possibly have you competing over the same clientele. Selling your business is risky if you do not have a plan for how you will replace your lost income.

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Should You Sell Your Family Business During Divorce?Business owners have three options when their business is a marital property that is subject to division in a divorce:

  • One spouse can retain full ownership by buying out the other spouse’s ownership interest or giving up other marital properties;
  • Both spouses can be co-owners of the business; or
  • They can sell the business and split the proceeds as part of the divorce.

The third option is usually the least popular because selling a business may be giving up your livelihood. There are some situations where selling a business is a viable option, but you still must consider the complications of doing so.

Receiving Fair Value

You want to be well compensated if you choose to sell your business and lose a source of income. Before presenting your business to potential buyers, you will need to assess your business’s value, including its potential for growth. With an estimated value, you will know what a fair asking price is for your business. Unfortunately, other factors may drive down what you can receive for your business. A downturn in the economy as a whole or in your industry may decrease the number of potential buyers and how much money a buyer will want to spend. You may need to keep your business if you cannot find a buyer willing to pay fair value.

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How Your Divorce May Affect Your BusinessGoing through a divorce can be perilous for your business, particularly if it is a smaller, family-run business. Some owners have seen the value of their business drop or lost control of it because of the consequences of the divorce process. It is important to work with your divorce attorney on protecting your business during the divorce and allowing it to thrive afterward.

Marital Property

You may need to fight for ownership of your business during your divorce negotiations. Your business is marital property if you created it during your marriage or used marital assets to invest in it. A business that predates your marriage can be nonmarital property, though the amount that the business increased in value during your marriage can be a marital asset. You have several options when your business is part of the equitable division of property. You can:

  • Have complete ownership of the business in exchange for other marital assets of equitable value;
  • Co-own the business with your former spouse after the divorce;
  • Split your business into two companies that you own separately; or
  • Sell your business and divide the proceeds.

The option you choose may depend on the size of your business and how involved your spouse is in it. Your spouse may be content to let you keep the business if he or she is not part of it. A spouse who helped create and run the business may be unwilling to give up his or her business ownership without ample compensation. However, co-owning or dividing a small business may be impractical, and selling your business means losing your source of income.

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