Introduction
As a business owner, you put a lot into your work. Time, effort, and money are the main foundations of a successful business. Often, though, operating a business is an exchange and what you put in is what you get out. As a result, you can find your personal assets bound to your business in ways you hadn’t expected. That can be a cause of concern, too. If your personal assets are connected to your business, even peripherally, are they at risk? All too often, the answer to that is yes. However, there is plenty you can do as a business owner to protect your assets. And fortunately, it’s never too late to implement new strategies to achieve that protection.
Business structure is central to protecting your personal assets as a business owner
Gaining the highest degree of protection for your personal assets is a job that begins early. In fact, the best time to protect your personal assets as a business owner is at the very creation of your business. The reason for that is simple: if your business is well-structured, creditors will find it difficult to access your assets. Of course, protecting your assets as a business owner is not always straightforward. It often involves complex legal and financial arrangements. That’s why getting to know your options is vital. Here are a few of the more common business structures, and what they offer in terms of personal asset protection.
Sole traders are susceptible to liability due to the structure of their businesses
Operating as a sole trader is appealing. Sole traders have relatively simple obligations in terms of tax, and establishing a business is simple. However, there is a cost for that simplicity: liability. Sole traders are defined by the manner in which they operate. As their title suggests, sole traders are solely responsible for the operation of their business. That includes all decisions that are made, and all agreements that are entered. Unsurprisingly, there is no corporate or legal entity separating sole traders from their operations. Consequently, their personal assets are exposed to a far greater degree than those of other operators.
Partnerships must be set up a certain way to protect personal assets
Partnerships expose business owners to liability in a similar way to sole trading structures. There is little separating partners from the decisions and conduct of their business. Effectively, as a result, partners stand in a position of relative vulnerability. However, within partnership structures there is space to separate business owners from the conduct of the business – at least to some degree. One way of doing so is to enter a partnership agreement through a legal or corporate entity. For example, if a business owner created a company which then entered into a partnership agreement, that business owner would have a higher degree of protection over his or her personal assets.
Companies and trusts are the best structures for protecting assets as business owners
In terms of protection for personal assets, trusts and companies are the most effective business structures. It is exceedingly difficult for creditors to pursue the personal assets of business owners who maintain such structures. However, there are still some things to be aware of. Firstly, it is important to note that the court can look past the protections of a company structure, during legal proceedings. However, that is exceptionally rare, and only occurs in certain circumstances. Secondly, it is important to remember that individual trustees can assume liability for a trust’s debt. Luckily, both those scenarios are avoidable if you take a few additional precautions.
There are a few other precautions business owners can take to protect personal assets
Business structures are certainly the most effective and expansive protections in terms of personal assets. However, they work best in conjunction with other protective measures. The chosen structure of a business is its platform – or centre – around which further fortifications may be built. Below, are a few such fortifications. These are effective when implemented correctly, but they can be complex. It’s important to seek professional advice when deciding which of these measures suit your business.
Distancing property from business owners is one way to protect personal assets
Distance is a highly effective defensive tactic in almost any situation. Protecting personal assets is no different. As a business owner, it is always ideal to distance yourself from your assets. One easy approach to that is transferral of ownership. The most common example of this is purchasing a house. If you own a business, it may be in your interests to purchase a home under the name of your spouse. Creditors are largely unable to pursue debts through the property of a business owner’s spouse. As a result, it is an effective defence against aggressive creditors, and it reduces your personal liability as a business owner.
Insurance: protect yourself from liability with the correct business insurance policy
Even with the most precise corporate and legal manoeuvring, the right insurance is vital. Such policies as professional indemnity and directors’ insurance will comprehensively protect you from personal loss. Legal frameworks surrounding the personal liability of business owners are complex. They are also dynamic, and changes are frequent. The final, and most impenetrable layer of defence is a suitable insurance policy. Insurance of that nature will negate the need for creditors to pursue debt relief against your personal assets.
Is it possible to completely protect your personal assets as a business owner?
The ultimate question for most business owners is this: can personal assets be protected completely? But there is no black and white answer to that question. Personal liability in a business setting varies with circumstance. That’s why professional advice is so important. The ongoing input of a skilled legal expert is the best way to assess the risks and liabilities you face as a business owner. It is also the best way to minimise those risks and liabilities, as your business expands.
By Finian McGrath
Disclaimer
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
Liability limited by a scheme approved under professional standards legislation.
