While adapting business operations and transitioning to new ways of working is paramount for business owners, unprecedented pressure on finances and cashflow can highlight the risks business liabilities can impose on a business owner’s personal affairs.
‘What if’ your personal assets were at risk from potential creditors or litigation? Here we shine the spotlight personal asset exposure, which is more common than you may realise, and what you can do to protect your personal financial position…
For Sole traders and partnerships
Many businesses were started with the simplest or most cost-effective structure available. This usually means, as a sole trader or partnership, you are personally responsible for business liabilities and your personal assets can be used to recover your business debts.
For a Company or Trust
While these structures create legal entities that create separation of personal assets from business activities, as a company director, you may still be subject to personal liability for company debts. This would be the case should your business be declared bankrupt or suffers losses caused by a breach of director’s duties.
Guarantors
A common situation where business owners get in to strife is acting as a guarantor for a loan taken out by your business. Any such personal guarantees mean you can be held personally responsible if your business is unable to service the loan.
Here’s what you can do to protect your personal financial position…
Review your business structure
A well set-up business structure can not only benefit your business, it can help protect your assets and achieve tax efficiencies. Structures including Companies and Trusts offer greater protection than Sole Trader or Partnership arrangements. A Company structure protects assets through the separation of shareholding and directorships, and generally shareholders can only lose the value of their shares rather than being liable for the company’s debts. Trust structures also separate the liability of your business from your personal affairs and offer asset protection for your personal assets.
Minimise your exposure
As your business grows or becomes more complex, it may be time to separate your personal and business affairs and hold certain assets in trusts such as a discretionary or superannuation trusts. It’s also important to consider who may be ‘at risk’ when appointing trustees. One of the most effective strategies for protecting your assets is to transfer your family home and any significant personal assets to those who are not at risk or not associated with your business, such as your spouse.
Protect your lifestyle
While most businesses have business insurances such as business liability insurance and buy-sell agreements in place to protect their business interests, the same cannot be said for personal insurances. Appropriate personal risk protection strategies should also form an important aspect of protecting your personal financial position.
In particular, Income Protection Insurance is well worth considering as its purpose is to cover your mortgage, living expenses and generally preserve your current lifestyle if you are unable to work and earn a living.
Next steps…
There are many complexities associated with structuring your business and personal insurances, making it extremely important to seek professional advice. In our experience working with clients, providing a sounding board to talk through needs and providing advice that is specific and appropriate to individual personal and business circumstances is the key to achieving great outcomes.
If you are looking to protect and grow your personal financial position, we can help with a tailored Business Structure Report to help you understand options for your business and the strategies available for protecting your personal assets. For more details please call us on 03 9708 8801 or email info@rvpartners.com.au.
At Robinson Voss Partners, we are known for empowering businesses to grow and owners to prosper.
We have over 40 years combined experience and expertise in specialised tax issues, accounting, business and financial advice. We are single-minded in our goal to help clients achieve business success and personal prosperity.
In our next article in our ‘Personal prosperity for business owners’ series, we outline wealth accumulation strategies for business owners.
General Advice Disclaimer: The information contained on this webpage has been provided as general advice only. The contents have been prepared without taking account of your objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this webpage, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.
