I was recently invited to sit on Your Business Panel. The panel was put together with the objective of assisting business owners by providing expert advice from different professions, in a unique question and answer session.
One question asked during the panel’s session highlighted to me the importance of asset protection in the structure of your business, and also the importance of keeping these asset protection objectives at the forefront of your mind throughout the course of your business.
Getting the Structure Correct – but not Sticking to the Structure
The case that sprang to mind was a recent matter where I acted for business owner. A brief summary of the facts are as follows:
- The client had previously sought specific advice in relation to protecting assets if the business was to fail;
- The client had received advice to set the business up so that it was operated by a company;
- The client was advised to ensure that all personal assets that she wished to protect were purchased in a trust, which was completely separate to the company;
- The client’s business was very profitable and the client wanted to purchase assets in the trust;
- The client purchased assets in the trust, however transferred funds by way of a loan from the business to the trust. The loans, over a period of time, crept up to be millions of dollars;
- The business is now experiencing critical cash flow issues and has large debts to a number of creditors, who are threatening legal action with the ultimate objective of winding the company up;
- At my first consultation the client understood that the assets in the trust, along with her own personal assets were protected;
- Some personal guarantees had been signed with creditors.
The Correct Structure for your Business
The structure implemented by this particular client had the right idea, but the execution was wrong. Some tips for your business structure include:
- Do not have the business in your own name, unless you hold no assets and have absolutely no risk of being sued (very rare!)
- Own the business in a company or trust structure, to avoid personal liability (keeping in mind that you can still be personally liable in certain circumstances such as insolvent trading and not paying Superannuation for your employees)
- Avoid signing personal guarantees
- When you buy assets of value, do not buy them in the same entity that owns your business
- Do not make inter entity loans to buy assets
- Try to keep assets separate to your business finances (i.e. do not offer them up as security to your bank, if possible)
- Constantly review your structure and get legal and accounting advice before you buy and sell an asset
- Review your Will
Inter Company Loans
What my client failed to realise when carrying out the asset protection objective of buying assets in a trust, was that the monies borrowed from the company could be clawed back by a liquidator, leaving the assets purchased in the trust vulnerable to being sold to fund the payback of the loans, and ultimately going to the creditors of the company.
This example highlights the importance of:
- getting professional advice when you first establish your company and business structure from an asset protection perspective, and;
- diligently following your asset protection objectives; and
- obtaining advice before any significant investments, or liabilities are entered into.
This client’s precarious situation could have been avoided if professional advice was obtained before the investments were purchased.
If you would like to discuss any of your asset protection objectives, please contact me as I would be more than happy to assist.