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How Can Business Owners Protect Their Personal Assets?

As a business owner, you will most likely be overwhelmed with thoughts concerning your business operations; however, if you are like many other business owners, then your biggest concern is how to protect your personal assets when your business performs poorly. The reason for this concern is that there is a chance you might lose everything, including your personal assets if something goes wrong. For example, in a situation where your business is in debt and cannot make the required repayments, the creditors can seize your business assets and your personal assets as a repayment of the debt, in this case, you will end up losing everything that you’ve worked hard for.

Knowing this, it is very important to keep your personal assets separated from your business liabilities where possible. This can be done by strategically establishing your business structure and personal finance in ways that will keep them both separated. The following steps can help you get started:

Choose the right business structure

There are a variety of business structures to choose from when establishing your business and choosing the right one is very important for your business’ long-term success. Each structure has its own costs and benefits, but in terms of personal asset protection, you should avoid choosing the sole trader and partnership structures. This is because these two structures will automatically identify you as an individual who is legally responsible for all aspects of the business, including the business liabilities. On the other hand, choosing to establish a Company or a Trust is a better option because it offers you limited liability. Find out more about these two structures below.

Trusts

You have the opportunity to operate your business as a Trust and use a Corporate Trustee. This structure offers limited liability because the company is a separate entity, giving you the ability to detached business assets from personal assets. Since both assets are assigned to different names, this allows you to protect your personal assets from creditors if your business is getting sued, is going bankrupt or being made insolvent. Note that the maintenance and set up cost of this business structure tends to be higher than most, but keep in mind the long-term success of your business, this structure might be worth considering.

Dual Company structure

A Dual Company is also another business structure that can protect your personal assets. How a Dual Company works is that your company, also known as the “operating company” will hold all of its shares with a subsidiary company, also known as the “holding company”. In this case, the operating company will conduct all the trading which includes entering contracts and hiring, while the holding company holds the business’ asset such as intellectual property and equipment. Therefore, any legal action taken will be directed to the holding company instead of the operating company and your personal assets will not be affected.

Transferring assets to someone you trust

If the above business structures does not suit you, another option is to transfer your personal assets to your spouse’s name or to a person whom you trust. This method allows you to detach your name from your personal assets and prevent the creditors from detaining your assets if something does go wrong within your business. This option is more straightforward and is popular with many business owners so it might be worth considering if you have someone whom you trust with this responsibility.

Create a strong corporate veil

Even if your company has the protection of limited liability, you as the director of the company can still be liable if you’re not acting within legal requirements and are using your business for bad intentions. It would be best if you made it impossible for the court to pierce your corporate veil by conducting business properly and not using your company to mask the real function and purpose. If the court finds any illegal activities performed by your company, then you can lose everything.

Having the right insurance

Setting up the proper business structure and acting within your legal limit will protect your assets, but it is not the only way to do so. You can further protect your personal assets and yourself by having the right insurance policies in place. A Directors and Officers Liability, coupled with a Professional Indemnity policy, will help you cover some of the legal costs and provide protection from reputational damages that may arise from a dispute. It is also practical to consider an insurance package such as a Business Insurance Pack, which can provide you with protection for property damages, business interruption, cyber protection and more. A Business Pack is an excellent way to minimise a variety of risks that might damage your business.

Have contracts in place that limit your liability

Lastly, to be sure that your personal assets are completely protected you must have all the right contracts and agreements in place and make sure to keep all the correct documents to prove it. These contracts should be placed to limit your liability and to define your relationship with stakeholders. Having these contracts and documents will eliminate loopholes or grey areas that can be exploited by creditors down the track. 

In order for these strategies to be effective and for them to keep your personal assets safe and secure, they must be put in place as soon as possible. Don’t wait until your assets are already under threat to do so because it might be too late.

If you want to learn more about reducing your risk, make sure you consult with your Accountant. At Futurenow Finance, we will work with your Accountant to ensure that the finance solution is in line with your risk strategy. If this is something you’re interested in, contact Sarah van der Spuy from FutureNow Finance on 1300 013 730 or email hello@futurenowfinance.com.au.