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How Are Retained Earnings from a Non-Marital Business Divided in Divorce?

In an Illinois divorce, retained earnings from a non-marital business can be considered marital property if a spouse is in control of how to disburse the earnings. Assets that are considered marital property are divided between spouses during a divorce. Non-marital property is assigned to the spouse who owns it. Retained earnings are one of the issues that arise when a divorce involves business ownership.

What Are Retained Earnings?

Retained earnings are the income available to be distributed as dividends to shareholders, pay wages, salaries, and bonuses, use for other corporate purposes, and reinvestment into the business, to help the company grow and compete.

Determining the Marital Property Status of Retained Earnings

Several cases have helped establish basic legal guidelines on when retained earnings from a non-marital business are marital property or corporate assets. Primarily, the level of discretion of the shareholder spouse is a significant determining factor.

In a divorce case involving a minority shareholder without much influence, the retained earnings are unlikely to be considered marital property. Retained earnings in Illinois may be regarded as marital if the spouse has control of the decision on whether to leave the earnings in the business, even if the corporation is non-marital property of the spouse.

Illinois courts often evaluate the nature and extent of the control of the shareholder spouse as well as the extent to which the retained earnings and profits factor into the corporation’s value and are used to fund the corporation’s business.

In one case, the husband owned 33% of the shares of a corporation. His father owned 47.6% of the shares, and his sister owned the remaining shares. The court held that in this case, the retained earnings were non-marital because the husband could not distribute retained earnings or declare dividends on his own.

A different case involved a spouse who was the sole owner of the non-marital business. He could disburse profits and withhold or declare dividends. In addition, the corporation did not hold the retained earnings to pay expenses. The court concluded that the retained earnings were part of the spouse’s income and were a marital asset.

In another case, the husband owned half of a company’s stock and was the chairman of the board. The officers had an account that they could use to take personal advances from the company. The account was secured by the corporation’s retained earnings. The court concluded that the retained earnings did not constitute the husband’s income and were, therefore, a non-marital asset.

Business ownership affects divorce proceedings in several ways. Divorce lawyers give people more information to make the proceedings more understandable and easier.

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Author: nohoarts