Protect Your Business
One of the most common concerns of business owners entering (or leaving) a marriage is protecting the business that they worked so hard to build. A well drafted premarital agreement can be a very effective tool to ensure that a party’s business remains their own should the marriage fail. While not every marriage (even those involving business or significant assets) is governed by a premarital agreement, that does not automatically put a non-marital asset at risk. But a very nuanced view of non-marital assets in Illinois case law has created a danger that a growing non-marital business may unexpectedly become marital, even though a basic understanding of the law would dictate otherwise.
First, a primer on non-marital assets. Any asset that a spouse owned prior to the marriage, or received by gift or legacy during the marriage is a non-marital asset. Also, any income, dividend, or increase in value of such an asset, or any asset acquired in exchange for a non-marital asset would also be non-marital. So it would make sense that if a non-marital business was profitable, the income would also be non-marital, and therefore the owner could take that non-marital profit to expand the non-marital business, the expansion also being non-marital.
But that is not necessarily the case. Illinois courts will view expansions of a non-marital business as marital if the expansions can be viewed as “separate and distinct business units”. So additional stores for a retail business, or additional parcels of real estate for a real estate business would be viewed as marital if those additional stores or parcels are acquired during the marriage, even if their genesis was a non-marital business, and purchased with funds that would normally have been non-marital.
How Do I Protect My Non-Marital Business and Grow?
Is there any way for a business owner to protect and grow their non-marital business? The Illinois court considered a case where the husband used non-marital assets to purchase three McDonald’s locations. During the course of the marriage, the husband expanded to 25 locations. The court’s own logic would dictate that these expansions would be marital. However, the court viewed the new locations as non-marital because the husband had purchased the new locations through debt which was collateralized by non-marital property – the original 3 McDonald’s stores.
What’s The Lesson?
The lesson here is twofold. First, acquiring new businesses with the intent of keeping them non-marital must be done with careful consideration and legal structuring. Second, these issues can all be avoided through the proper use of a premarital agreement.