Protecting your assets
There’s been a lot of reports in the news lately about businesses going broke and the effect that this has on the business owner, suppliers, subcontractors and others … sometimes devastating.
Sadly, many times families lose everything, often having to start again due to no fault of their own. Often in these cases they were a supplier to another business that went ‘under’ and they didn’t get paid.
You’ve probably heard of other times when a business goes under owing suppliers and other creditors significant amounts of money, but the business owner gets to keep their house and other assets.
How do they manage to keep their assets when their business fails?
Separating your assets
For this article, we’re going to keep things simple – there are basically 2 types of assets:
- Investments & Personal Assets (your house, investment property, shares, etc.) – these are low risk investments where, worst case scenario, if something goes wrong (e.g. share market crash) the shares will be worth nothing, but they will not affect your other investments; and,
- Businesses – these involve risk. When something goes wrong in a business it can result in debts that go beyond what the business is worth.
The ideal situation is to be able to separate the two types of assets such that if something was to go wrong with the business then the investment & personal assets are protected from creditors and other debts.
How do you separate your assets?
Separating assets can be done in lot of different ways. For example:
- Husband and Wife. One partner could be the owner of all investments and personal assets (e.g. the house) and the other partner the owner of the business. In this case, in the event of the business going bankrupt, the other partner would keep the investments and house.
Note: This is why I rarely recommend a partnership business structure! As in the event that something goes wrong in the business both partners’ assets are exposed to the business debts and therefore effectively offering no asset protection.
- While only being one person, and individual could create the separation by establishing another entity ie a company. That way the business is held by the company and in the event that something goes wrong with the business, the company can be wound up potentially leaving the individual with their assets in tact.
Careful deliberation needs to be given in planning the best method of how to structure finances to also consider:
- What assets you currently have – for example, a young tradie about to go into business may have very few assets; therefore, the cost of setting up the structure would outweigh the benefits. This should be reviewed as you build up assets.
- Taxation implications
- The cost of the structure vs the ongoing benefit
- The actual risk of the business
When structuring your business may not help
While having a structure can protect you there are instances when it may not offer you protection for example:
- With bank debt, the financier may require personal guarantees from the person holding the assets in order to provide you with a loan – that way if something does go wrong in the business the bank will have a claim over the assets.
- Landlords and suppliers requiring personal guarantees in order to lease a premises or obtain trade credit. Take care to read all credit application forms to see what exposure you have.
- Insolvent trading (trading when you know you can’t meet your debts). Directors of companies may be personally liable.
Everyone’s circumstances are different, so there is no ‘one-size-fits-all’ solution! Careful consideration needs to be given when setting up a business and to revisit the scenario regularly to make sure that they structure still works for you. That’s why a good relationship with your accountant is important. Talk to us as at any stage of your business life and work out what’s best for your situation.