It is not unusual for an owner of a closely held corporation to adjust his/her and the corporation’s employees’ compensation, make loans to the corporation, or take other actions. These actions may affect the value of the corporation. If the owner is involved in a divorce proceeding, however, he/she should use caution in taking such actions in order to avoid a claim from his/her spouse that such action is a dissipation of marital assets even though the actions taken were in the ordinary course of business or in response to changing business conditions.
In Illinois, dissipation occurs if one spouse uses marital property for his/her own benefit during a period when the marriage was in the process of an irreconcilable breakdown. A spouse charged with dissipation must establish by clear and convincing evidence that the funds were appropriately spent for marital, and not non-marital, purposes.
A claim of dissipation may arise out of various actions taken by the owner of a closely held corporation, such as:
1. A decrease in the compensation paid the owner.
2. An increase in the compensation paid one or more of the corporation’s employees.
3. A loan by the owner to the closely-held corporation.
4. Any action which would have the effect of decreasing the value of the closely held corporation.
5. Payments by the closely held corporation to third parties out of the ordinary course of business.
In order to avoid a dissipation claim, the owner of a closely held corporation must be prepared to show by clear and convincing evidence that any of the above actions taken by the company were for a legitimate business purpose. Thus, if an owner desires to decrease his/her compensation or make a loan to the closely held corporation, he/she should document the financial condition of the corporation which requires such action. If the owner desires to increase the compensation of one or more employees or make a payment to a third party outside the ordinary course of business, the owner should document the basis for the compensation increase or payment and be prepared to establish that compensation or payment is consistent with the payments to others who are similarly situated. Finally, if the owner desires to take an action which will affect the closely held corporation’s value, such as a loan to expand the business or buy out other shareholders, purchase equipment, or acquire a competitor, the owner should document the business plan or strategy supporting each such action.
If you have a question about what constitutes a dissipation of a marital asset or how to document a corporate action to avoid a dissipation claim, please telephone a member of the firm.