Asset protection in a volatile economy
Introduction
As a business owner you need to consider the most appropriate structure through which to run your business. An appropriate structure will not only provide taxation benefits, but also provide flexibility and protection to you from business risks and protection for your personal assets. In the current volatile economic climate this is more important than ever.
There are a number of structuring alternatives available, however, it is important to remember that there is no one business structure which will meet the needs of all business owners. Also, we often find that business owners do not consider the implications of their structuring decisions and ultimately end up paying for this through higher effective tax rates throughout the life of the business as well as putting their personal assets at unnecessary risk.
Consideration should always be given to your own personal circumstances. An effective structure does not have to involve a high level of complexity, rather it requires consideration of the current and future needs of you and your business. These needs will often be met by a relatively basic structure.
In considering an appropriate business structure, it is vital that this is done before you purchase your business. Changes to your business structure after the business is established will potentially give rise to both CGT and Stamp Duty, two costs which you can avoid if you structure correctly from the outset.
Asset protection considerations
In our increasingly litigious economic environment, asset protection is a real issue which needs to be considered by business owners. A business may be at risk, not only of being sued by customers, employees or suppliers but it is also at risk of being prosecuted from regulatory bodies for breaches of law. As a result, the structure you use for your business is important, as it needs to provide the greatest level of protection for you and your personal assets. This is crucial in a volatile economy.
Generally the greatest asset protection is provided by a company or trust structure. A company is a separate legal entity that provides limited liability for shareholders, meaning that the extent to which the assets of the shareholder are at risk is limited to the assets held in the company. This means that personal assets of the business owner are not at risk in the event the business is sued or prosecuted. It is important to note however, that in the event a company is proven to be trading whilst insolvent, the Director’s personal assets may still be at risk.
The use of a Trust structure to hold a business is also an effective asset protection strategy. A Trust structure provides asset protection as there is a separation of the business assets from the individual. Although a Trust is not a separate legal entity, the business will be held in the name of the Trustee (which would usually be a company). However the Trustee does not actually own the business as it is merely held in trust for the benefit of the beneficiaries. This creates a legal separation of the business from the individual.
You should always ensure that personal assets are held in a separate entity or entities from your business. If structured appropriately, in the unfortunate event that your business becomes financially distressed, liability for the business’ debts will be limited to the assets of the business and your personal assets will not be at risk (note the exception outlined above where a company is proven to be trading whilst insolvent).
Where you have funding in place, we recommend that wherever possible the funding is only secured over the assets of the business. If the business funding also involves providing a personal guarantee or pledging personal assets as security and your business is unable to repay its debt, you may end up in a position where the financier can call upon your business and your personal assets, such as the family home, resulting in unnecessary stress on the whole family. You should seek our advice before you and/or your fellow business owners sign any personal guarantees to your bank or financial institution.
We often find that business owners either do not have a Will in place, or have a Will that was drafted a number of years ago and does not reflect current asset holdings or personal circumstances. An appropriately drafted Will can provide asset protection for your family by ensuring that in the event of your death, assets are distributed to appropriate beneficiaries in accordance with your wishes. It may be the case that you want some of your assets to be inherited by a specific family member, however if no Will is in place, all assets will generally default to your spouse. This is an area that tends to be emotional, and as a result we find that people are often reluctant to discuss this issue with their adviser, however we highly recommend that you regularly review your Will to ensure it meets your needs and current circumstances. Also, make sure that someone close to you knows where your Will is located, in case it ever needs to be used.
Other structures
Other structuring alternatives include operating your business in your own name as a sole trader or through a partnership structure, however generally these structures provide little or no flexibility to distribute business income and also do not provide the level of asset protection afforded by companies and trusts. If you operate as a sole trader or enter a partnership structure personally, all business income will automatically be taxed in your personal name at marginal rates, without the ability to utilise other individuals who have lower taxable incomes. Furthermore, sole traders and partnerships (where entered into personally) provide no separation of your personal assets from those of the business, leaving you at risk in the event the business is sued or prosecuted. More complex partnership structures are available where the partners in the partnerships are not individuals, but rather a trust or company.
Conclusion
The type of entity structure used for your business potentially results in not only tax benefits throughout the life of the business but also protection for your personal assets. By considering other basic principles such as where personal assets are held and whether your Will is up to date, you may have peace of mind that your are not unnecessarily putting your personal wealth at risk.
With so much uncertainty at the moment, there are things you can do which can create some certainty and peace of mind, no matter what is happening with the economy. This is where good advice provides real value.
T +61 2 8297 2555
As a business owner you need to consider the most appropriate structure through which to run your business. An appropriate structure will not only provide taxation benefits, but also provide flexibility and protection to you from business risks and protection for your personal assets. In the current volatile economic climate this is more important than ever.
There are a number of structuring alternatives available, however, it is important to remember that there is no one business structure which will meet the needs of all business owners. Also, we often find that business owners do not consider the implications of their structuring decisions and ultimately end up paying for this through higher effective tax rates throughout the life of the business as well as putting their personal assets at unnecessary risk.
Consideration should always be given to your own personal circumstances. An effective structure does not have to involve a high level of complexity, rather it requires consideration of the current and future needs of you and your business. These needs will often be met by a relatively basic structure.
In considering an appropriate business structure, it is vital that this is done before you purchase your business. Changes to your business structure after the business is established will potentially give rise to both CGT and Stamp Duty, two costs which you can avoid if you structure correctly from the outset.
Asset protection considerations
In our increasingly litigious economic environment, asset protection is a real issue which needs to be considered by business owners. A business may be at risk, not only of being sued by customers, employees or suppliers but it is also at risk of being prosecuted from regulatory bodies for breaches of law. As a result, the structure you use for your business is important, as it needs to provide the greatest level of protection for you and your personal assets. This is crucial in a volatile economy.
Generally the greatest asset protection is provided by a company or trust structure. A company is a separate legal entity that provides limited liability for shareholders, meaning that the extent to which the assets of the shareholder are at risk is limited to the assets held in the company. This means that personal assets of the business owner are not at risk in the event the business is sued or prosecuted. It is important to note however, that in the event a company is proven to be trading whilst insolvent, the Director’s personal assets may still be at risk.
The use of a Trust structure to hold a business is also an effective asset protection strategy. A Trust structure provides asset protection as there is a separation of the business assets from the individual. Although a Trust is not a separate legal entity, the business will be held in the name of the Trustee (which would usually be a company). However the Trustee does not actually own the business as it is merely held in trust for the benefit of the beneficiaries. This creates a legal separation of the business from the individual.
You should always ensure that personal assets are held in a separate entity or entities from your business. If structured appropriately, in the unfortunate event that your business becomes financially distressed, liability for the business’ debts will be limited to the assets of the business and your personal assets will not be at risk (note the exception outlined above where a company is proven to be trading whilst insolvent).
Where you have funding in place, we recommend that wherever possible the funding is only secured over the assets of the business. If the business funding also involves providing a personal guarantee or pledging personal assets as security and your business is unable to repay its debt, you may end up in a position where the financier can call upon your business and your personal assets, such as the family home, resulting in unnecessary stress on the whole family. You should seek our advice before you and/or your fellow business owners sign any personal guarantees to your bank or financial institution.
We often find that business owners either do not have a Will in place, or have a Will that was drafted a number of years ago and does not reflect current asset holdings or personal circumstances. An appropriately drafted Will can provide asset protection for your family by ensuring that in the event of your death, assets are distributed to appropriate beneficiaries in accordance with your wishes. It may be the case that you want some of your assets to be inherited by a specific family member, however if no Will is in place, all assets will generally default to your spouse. This is an area that tends to be emotional, and as a result we find that people are often reluctant to discuss this issue with their adviser, however we highly recommend that you regularly review your Will to ensure it meets your needs and current circumstances. Also, make sure that someone close to you knows where your Will is located, in case it ever needs to be used.
Other structures
Other structuring alternatives include operating your business in your own name as a sole trader or through a partnership structure, however generally these structures provide little or no flexibility to distribute business income and also do not provide the level of asset protection afforded by companies and trusts. If you operate as a sole trader or enter a partnership structure personally, all business income will automatically be taxed in your personal name at marginal rates, without the ability to utilise other individuals who have lower taxable incomes. Furthermore, sole traders and partnerships (where entered into personally) provide no separation of your personal assets from those of the business, leaving you at risk in the event the business is sued or prosecuted. More complex partnership structures are available where the partners in the partnerships are not individuals, but rather a trust or company.
Conclusion
The type of entity structure used for your business potentially results in not only tax benefits throughout the life of the business but also protection for your personal assets. By considering other basic principles such as where personal assets are held and whether your Will is up to date, you may have peace of mind that your are not unnecessarily putting your personal wealth at risk.
With so much uncertainty at the moment, there are things you can do which can create some certainty and peace of mind, no matter what is happening with the economy. This is where good advice provides real value.
Author: Troy Wilson, November 2008
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