When starting your own business, you must employ the right people, build relationships with good clients, and market your business. However, considering how your business should be structured and whether it can effectively protect your business and personal assets may not make that list. After all, most businesses do not think they will face debts, legal challenges or other unforeseen circumstances that threaten their assets.
But the reality is many Australian companies find themselves precisely in that position. If you find yourself in such circumstances, you will be grateful to have chosen a business structure that better protects your wealth and assets. This article explores three steps you should consider when structuring your business to protect your assets better.
Step 1. Set Up Your Business as a Trading Company
Many business owners initially set up their companies as sole traders or partnerships because these structures are simpler and cheaper. In contrast, a company may seem more complex. However, setting up your business as a company has many benefits, including protecting your assets.
Under the law, a company is a separate legal entity capable of entering into contracts and incurring liabilities, such as debt. The company itself is obligated to perform those contracts and meet those liabilities, not the shareholders or the directors in their personal capacity.
As a result, should a successful claim be made against your business and your business cannot meet the monetary requirements of that claim, your creditors will only have recourse against the business and the business assets, not your personal assets.
Note: Nevertheless, any directors of the trading company would still be subject to directors’ duties under the law. Hence, in certain circumstances, they can be held personally liable. For example, directors are personally liable for the tax debts of a company.
Step 2. Set Up a Holding Company To Be the Shareholder of Your Trading Company
To protect your personal and business assets, you may consider setting up a holding company and making that company your trading company’s only shareholder. You should then provide any surplus cash from the business to the holding company as dividends or profit distributions. This way, the trading company is not holding a large amount of equity at any time.
Likewise, the holding company should own any valuable assets of the trading company and lease them to your trading company at a market rate. This separates your assets from your trading company which will carry on your everyday business. Therefore, should someone bring a claim against your business, your trading company does not hold any significant assets that your creditors will have access to.
Step 3. Set Up a Discretionary Trust To Hold Your Personal Assets
Steps one and two provide a structure that may protect your assets if your business runs into trouble. However, it is usual for third parties you deal with to require a company’s shareholders or directors to personally guarantee the performance of the trading company’s obligations under a contract. Most notably, this includes payment of debt.
Therefore, while ensuring your business performs all its contractual obligations, it is also important to take proactive steps to protect your personal assets. This is where step three comes in.
Under step three, you may set up a discretionary trust where you:
- transfer your personal assets to the trust
- appoint a corporate entity as the trustee and
- appoint yourself as the beneficiary of the trust.
This trust structure can protect your personal assets from creditors’ claims, even if you become bankrupt. Although this step is great from an asset protection perspective, it can also mean significant tax implications associated with transferring assets to a new entity.
Many business owners seek to protect personal and business assets via business structures. Following some steps can save you a lot of wealth and heartache if your business finds itself in a difficult circumstance. One possible way to structure your business is by setting up your business as a dual company and placing your personal assets in a discretionary trust. Nevertheless, what constitutes the best structure for your business depends on your circumstances. Talk to you accountant and obtain legal advice when considering how you structure your business to protect your assets.
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