In any divorce, some of the most complicated questions that arise involve how the couple’s assets will be divided. This can be especially true if one spouse has invested in ownership of a closely-held company, as the valuation of such a business must take into account a large number of factors. One of these factors is often the amount of revenue held within the business from year to year as a reserve or for future use. Known as retained earnings, this money may be subject to property division in divorce if it is determined to be marital property.
What are Retained Earnings?
Any company looking to grow must develop a strategy for budgeting income. Very few businesses are able to flourish if every dollar coming in the door is immediately used to satisfy liabilities or distributed to shareholders as profit. Successful business owners ensure the payment of liabilities and set a reasonable limit on profit distribution, leaving some of the realized income as retained earnings for future investment, capital improvements, or as a type of insurance for slower periods. Retained earnings are certainly a consideration in the overall health and value of a company, but their disposition in a divorce is dependent upon the invested spouse’s level of control over them.
Are Retained Earnings Subject to Division?
While Illinois law provides guidance on how marital property is to be divided during divorce, there is no way to statutorily cover every specific situation. As such, the matter of retained earnings must be considered based on the particular circumstances of each case. There have been two relatively high-profile cases in Illinois regarding retained earnings, each of them reviewed by an appellate court, and each with a different outcome.
The first case, In Re: Marriage of Joynt, involved a husband who shared ownership of a family business with his father and sister. The man held 33 percent of the company, while his father held nearly 48 percent, and his sister owned the remainder. Although the company had retained earnings in excess of $3 million, they were held completely separately from distributed dividends, and with his interest in the company, the husband had no control to decide otherwise. The trial court, as well as the appellate court, found that the retained earnings were not part of the marital property to be divided.
Alternatively, a business owner with full control over the assets of a company may find retained earnings treated differently, like the husband in the second case, In Re: Marriage of Schmitt. In this case, the owner did not carefully separate dividends and retained earnings, instead keeping them together and regularly using the funds in contributing to the marriage. Despite the ownership of the business predating the marriage, the owner’s spending habits and record-keeping led the appeals court to determine that the retained earnings should be treated as income attributable to his personal efforts, much like wages and bonuses. Therefore, the retained earnings were to be considered in the division of assets.
Legal Help for Your Case
While these cases have established some level of precedent in Illinois, it is important to remember that no two situations are exactly the same. If you or your spouse own a business, every detail may be important in determining how retained earnings should be handled in divorce. For more information, contact an experienced St. Charles divorce attorney today. We will review your case and help you understand your options in protecting your assets. Call now to schedule your free consultation.