Author: Tony Rule, Partner, TAG Financial Services
Business owners are unknowingly putting their business and personal assets at risk through the use of outdated and ineffective business structures. We have found that many business owners mistakenly believe that by operating their business in an entity separate from their personal assets (in other entities) their personal assets are safe.
Often, this is not the case and personal assets can be attacked by creditors of the business if something goes wrong. Directors of a business can be made liable for the liabilities of the business if there is thought to be negligence, fraud or trading whilst insolvent leading to the demise of a company. In addition, loans from the business to the owner or related entities can also put assets at risk.
As a result of these and other issues, the assets of the director can be attacked which may include the shares he/she holds in other entities, loans made by other entities to their trading entity and personal assets such as the family home or holiday house.
Hard Work
When it comes to business, it is the owners that usually work the hardest, take all the risks and get paid the least. Often, they forgo high wages and profits in the short term in order to build substantial assets over time. This is why it is critical for business owners to protect the assets they have accumulated over an extended period of time. There is no point working hard for many years to accumulate assets if those assets can be taken away from you if/when something goes wrong.
What are the Risks?
Business owners face a variety of risks when dealing with customers, suppliers and employees. If something goes wrong, it is these people that will try to sue the business (and then potentially you as director). Sadly, agreements can lead to disagreements, and it is best to accept that this can happen – and then plan and protect yourself rather than hope that it never happens to you.
Many business owners have found that “hope” is no defence when something went wrong. The new reality is that litigation is increasing each year (in large part driven by lawyers offering “no win – no fee” services) which encourages people to take legal action as they have nothing to lose. This can even result in unjust claims being made against you with the intention of negotiating a settlement which is often cheaper than defending your legal position in a court of law.
What does this mean for you?
Business owners need to protect their business and personal assets from these business risks. Having a proper business structure in place protects you and your family from losing assets such as your house or other personal investments if action was to be taken against you or your business.
A proper business structure for you will depend on your particular situation, but often it involves the use of companies and trusts in the right way as well as taking simple steps like making sure the family home is owned by the spouse that is not a director of the business. These little things are often overlooked in the excitement of commencing a new business venture.
Next steps
As your life, your business and your assets change over time, your asset protection strategies need to be checked to make sure they are still appropriate.
Some simple changes now can lead to significant improvements in asset protection in the future. Your asset protection should be reviewed on an annual basis to determine your safe zones and your risk areas to ensure assets are not unnecessarily exposed.
Any questions?
If you would like to discuss your current asset protection and ways to improve it, please contact Tony Rule for a chat.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.