We don’t like to think about things going wrong, but it’s important to be prepared for the worst. When you’re starting a business, one major thing you should consider is whether your assets would be protected.
Fortunately, there are some simple asset protection steps you can take:
1. Ensuring your business is correctly structured
Business structuring is an important factor in protecting your assets. Your level of protection, particularly for your personal assets, is determined by the structure of your business. While every business has individual needs, here is a general guide to business structuring and asset protection:
Sole trader – As a sole trader, you retain all profits but are also responsible for all losses. Personal assets in your name may be used to recover your business’ debts if you are unable to repay them – this includes jointly owned assets. This business structure offers no personal asset protection.
Company – A company is a separate legal entity. If a company has liabilities or owes debts it is generally the company’s responsibility to pay those debts, meaning your personal assets are protected.
Partnership – A partnership, unlike a company, isn’t its own legal entity. Like sole traders, partners are responsible for all debts incurred by the business – even if they’re created by other partners without their knowledge.
Trust – A trust is an entity that holds property or income for the benefit of others; it can be run by an individual trustee or a corporate trustee. The trustee is liable for the trust’s debts, so therefore if you have a company as trustee you get similar personal protection to a company.
Have a look at what business structure is right for you; this could depend on who owns the business, what personal assets they have and they type of business they’ll be running. Higher costs in establishing your business may mean greater asset protection in the long run.
2. Separating ownership of business and personal assets
It is essential to keep business and personal assets separate. If something were to go wrong with your business, debtors could lay claim to your personal assets if they are not clearly separated from your business.
As an example, if a wife owns a company, then personal assets could be placed in her husband’s name, effectively separating the two entities and protecting their personal assets. This could also be achieved by establishing two separate entities – a company to own the business and a family trust to hold personal assets.
Insurance is integral to asset protection. No matter what other measures you take to safeguard your assets, insurance must be part of your asset protection plan. It’s important to get the correct insurance which offers the proper financial protection for your business, so be sure to do your research. Conversely, you should not rely solely on insurance for asset protection – a multi-faceted approach is key.
By making consistent, planned contributions to a regulated superannuation fund you can minimise your amount of exposed assets – while improving your tax benefits – as creditors are usually unable to access this money. It is important to note that money needs to be added consistently and intentionally, not as a lump sum in an attempt to protect money at the last minute.
This article covers the basic and most common asset protection techniques used, but there are also more advanced options available. If you want to know a bit more about this topic, download our free ebook Business structuring: An expert’s guide to getting started or call us on (02) 4044 1245.