Personal asset protection is usually a high priority for new businesses, and it should remain that way throughout the business’ life.
However, as a business matures and circumstances change, it’s not uncommon for business owners to find their personal assets at risk. In this article, we highlight the obvious and not so obvious threats to your personal assets.
Business structure
Understandably, many businesses start out with the simplest and most cost-effective structure available. Typically, a sole trader or partnership will involve registering the business in individual names. However, the personal risk exposure can be immense for simple structures such as this, as any successful legal action against your advice or services could result in your home being sold and personal bank accounts drained to meet a successful claim.
An appropriate business structure such as a company or trust places a wall between your personal liability and your business activities and financial obligations.
In our experience, time is the most common reason why business owners fail to review or upgrade their business structure, along with a dose of “she’ll be right”.
While protecting your family home and lifestyle from legal action should be enough, another compelling reason to review your business structure is that it’s likely you’re paying more tax than necessary.
At the very least, the company tax rate for business is significantly lower at 25% compared with an individual tax rate, which can be as much as 45% plus the 2% Medicare Levy.
However, even business owners who have implemented an adequate structure and have a good grasp on the importance of asset protection should review their existing structure from time to time. This will identify any new circumstances, such as taking on business partners, financing or refinancing, while continuing to protect your personal assets and overall best interests.
Appropriate and CURRENT insurance
It’s not uncommon for business owners to hand over the administrative reins to an employee, only to find important matters such as insurance policies have lapsed or no longer have a sufficient cover amount. Unfortunately, in these circumstances, the dire financial consequences are often only realised when a claim is made.
An appropriate risk strategy, including Professional Indemnity and Public Liability insurance to cover amounts suitable for adequately meeting any legal claim against your business, is central to protecting your business and in turn, personal assets.
Other insurances covering your premises, employees (WorkCover) or as required by industry standards (QBCC) should also be reviewed regularly.
Appropriate and current insurance policies for your business is a less obvious asset protection measure that can have a profound impact on a business owner’s current and future personal assets.
Personal lending
Business owners who have accumulated wealth are often in a position to help others by financing a new business venture or funding a personal matter, such as the deposit on a home.
Whether you intend for the loan to be repaid or not, it is important to legally draw up a loan agreement outlining conditions and obligations and have it registered along with security documents so you are formally recognised as a creditor. This is important should circumstances sour, as you will have a financial entitlement to any liquidated assets and will stand to get some or all of your money back.
Guarantees
Providing a personal guarantee for someone else’s financial responsibility is always fraught with complexity. Despite the emotional pressure that often accompanies requests made by those close to you, it requires very careful consideration.
The previously mentioned formal loan agreement may be a more suitable arrangement than the possibility of becoming embroiled in a situation out of your control, but for which you are personally responsible.
Less obvious personal asset threats include directors giving their personal guarantee on documents relating to their business as required by financiers/banks, landlords and trade suppliers. It’s important to read what’s put under your nose to sign, because what might look like an administrative matter could actually be about personal asset protection, putting you at risk should business matters take a turn for the worse.
Proper personal asset protection that takes into consideration these situations commonly includes ensuring a limit to the liability is included in the guarantee conditions. Placing personal assets, such as bank accounts and the family home, in the director’s spouse’s name or others who have no financial connection to the business can also be a wise move.
Next steps
The reality for most of our business clients, particularly those in the Baby Boomer and Gen X age brackets, is that they are worth more now than they were 10 years ago, or even five years ago.
Personal asset exposure, in the simplest terms, is about being aware of what you have and how it will be protected should the business go belly-up or someone comes after you.
If any of the matters described here are setting off alarm bells, give our office a call and talk it through. Personal asset protection is at the heart of what we do every day for our clients, as it transcends business and tax considerations to have direct personal financial implications.
If you need advice about this or any of the other topics we write about, please do not hesitate to call us on (07) 5438 8088 or email mail@corebusiness.com.au.
Core Business Accountants specialise in business advice for growing and mature family-owned and small and medium-sized businesses.
