What is asset protection and why is it important for individuals and businesses?
Asset protection is a relevant consideration in the establishment of any business. Effective asset protection strategies can limit and in some cases avoid liability for individuals who are carrying on a business.
Commonly, businesses are conducted via a company or trust structure. The general rule is that shareholders of a company or beneficiaries of a trust are not responsible for the liabilities incurred by the relevant company or trust. There are exceptions to this general rule. For instance, directors who are also shareholders of a company may be personally liable for unpaid tax liabilities or if the company is trading whilst insolvent.
Even so, individuals who operate a business via company or trust will be in a much better position than if they were carrying on the business in their own right as a ‘sole trader’. Sole traders are personally liable for all the debts of the business.
Another asset protection strategy is to ensure that business assets are held by a separate entity to the one which is carrying on the trading activities. This will ensure that these assets are protected from the creditors of the trading entity. For example, it is recommended that real estate be held in a separate trust (in order to maximise tax benefits) and that the trust lease the real estate to a company which is carrying on the trading activities. In this way, the real estate will be protected from creditors of the company.
Why is asset protection important?
Effective asset protection strategies can also prevent a spouse or de facto from obtaining business assets in the event of a family breakdown.
The purpose of this article is not intended and should not be taken as legal advice, as it does not take into account your particular circumstances or needs. You should seek advice from a professional advisor about the tax implications associated with any asset protection strategy before you implement the strategy.
If you have any questions relating to asset protection please don’t hesitate to contact me.
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