Why & How Do I Protect My Assets?
It’s a common misconception that asset protection is only for those who have already amassed significant money; in reality, however, it works best when started as soon in life as feasible. After all, you wouldn’t be venturing into business ownership unless you believed there was a chance of making a profit from it!
A person who is already wealthy is going to suffer a lot less financial blow as a result of a lawsuit than a person who is just starting out in the company.
A number of potentially catastrophic life events can be mitigated with the assistance of asset protection measures. Every company ought to purchase coverage for their legal obligation to the general public.
It is impossible to overstate how much cheaper insurance is in comparison to a payout of ten million dollars. After an incident, attempting to safeguard your assets by transferring them to your spouse or family will not be effective. The courts have the authority to investigate and take assets based on the paper trail.
- a death, a divorce, or the dissolution of the family
- failure to pay your company’s obligations due to insolvency or a lack of available cash
- legal action against your business
Fundamental Strategies for the Protection of Assets
Tactic 1 – Eliminate Your Exposure To Any And All Risks
Taking away one’s vulnerability to risk is something that’s simple to say but incredibly challenging to do in practice. When it comes to the topic of protecting one’s possessions, this is the statement that is simultaneously the most obvious and the least beneficial to make.
Doing electrical work on a construction site is not something you should be doing if you are a bricklayer.
You have no business offering financial guidance if you are a certified public accountant. If a beauty therapist doesn’t have the proper training, they shouldn’t be administering Botox to their clients.
Always make an effort to keep your business dealings within the bounds of acceptable professional conduct; all it takes is one slip to open the door to legal action alleging negligence.
Tactic 2 – Insurance
As a standard component of their overall business insurance package, every company ought to purchase coverage for their legal obligation to the general public. It is impossible to overstate how much cheaper insurance is in comparison to a payout of ten million dollars.
We highly encourage that all of our customers work with a trained professional to handle their insurance needs because an insurance broker can frequently save you more money than his charge.
Tactic 3 – Don’t Own Anything
After an incident has occurred, attempting to safeguard your assets from being taken by the courts in a legal action by selling or transferring them to your spouse or family members will not be effective. The courts have the authority to investigate and take assets based on the paper trail. Once bankruptcy proceedings have been initiated, a court has the ability to potentially look back for a period of four years at any asset transfers that have occurred.
In an ideal scenario, a member of your trusted family owns the relevant assets that are held within another legally separate corporation. Alternatively, your assets are held within an SMSF, which was established at the time that you initially came into business.
When you transfer assets at a later period, it may produce issues with regard to the capital gains tax, which will result in your having to pay taxes even though it was not necessary.
What Structures Will Protect Your Assets?
The owners of businesses have access to a variety of assets that can be used to both diversify their holdings and safeguard those holdings. If a customer is interested in a testamentary trust or a bloodline trust, we will always refer them to a professional; however, there are a number of structures that can be readily discussed;
| Structure | Features that Protect Your Assets |
| Sole Trader | None. This is the most straightforward structure to establish, but it provides no asset protection in the event of a breakup in a family or spouse relationship, personal bankruptcy, or legal action. Because of this, the safety of the family home is in jeopardy. This is a very perilous situation. |
| Partnership |
The preceding is applicable in situations where the partnership comprises single proprietorships.
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| Company | Because a corporation is its own distinct legal entity, the assets of the firm are legally distinct from those of the owner’s personal estate. In the event that legal action is taken against the firm, a creditor will have the ability to make an assault on the assets of the company, but they will not have the ability to make an attack on the assets of the shareholders. On the other hand, if the individual is the subject of a legal action, the creditor may go after the individual’s assets, which may include ownership of the shares of their company. This is something that needs to be considered very carefully when many owners of small businesses provide directors guarantees at the beginning of the business relationship in order to obtain funding or establish relationships with suppliers. There are several exceptions to the rule, particularly Directors Penalty Notices that can be issued when a director is found to have violated their duty. |
| Discretionary Trust (often a “Family Trust”) | A well-liked method for protecting one’s assets, this piece of guidance has been the gold standard for as long as I can remember it. A trust that is overseen by a corporation has several advantages, including those associated with the trust’s role as a business entity and those associated with the corporation’s function as an asset holder. As is the case with corporations, this will protect you from having legal action taken against the company, but it will not prevent the company from having legal action taken against you! It is not uncommon for one spouse to be the only shareholder of the corporate trustee, while the one who makes decisions for the firm is appointed to the directorship of the corporate trustee. This only allows the decision maker of the business to be sued for breaching their directors obligations (which you shouldn’t be doing!), but it does not allow for legal action to or from the business itself. One of the drawbacks of doing so is that you will no longer have complete authority over the shares. |
| Unit Trust | This structure is comparable to that of a discretionary trust; however, in the event that legal action is taken against the persons, the units are available for purchase. These units are what are distributed with a portion of the profit, and having them taken away from you should be avoided at all costs. |
| Self Managed Super Fund | As long as you are not in violation of any NALI rules or sole purpose tests, investing in assets through a superannuation fund can be a smart move and even a profitable one. Before you move through with this plan, you should discuss it with a financial adviser, which is something we can help you find! |
Mum & Dad Business Owners, Investors & Asset Protection
When a married couple seeks to secure their assets, one of their primary goals should be to safeguard the family home and any other investments they may have. It is common for one partner in a married couple to exercise control over the company; as a result, this partner is a less desirable choice for asset ownership.
The following are our suggestions for setting up an entity according to a standard template. We are aware that each person’s situation is unique, and because of this, we strongly recommend that you consult with us before establishing any companies.
Our Recommendation for Mum & Dad Business Owners
- The organisation ought to be structured as a discretionary trust with a corporate trustee; doing so will enable profit distributions to be made to the individual who will benefit from them the most from a tax perspective, irrespective of who owns shares in the company.
- The spouse who is not actively involved in the business should be the only owner of the shares of the corporate trustee. This protects the riskier spouse from being personally sued and prevents them from losing control of their company.
- Regardless of who actually owns the company, the non-owning partner should serve as a director of the corporate trustee. This would place them in charge of the company.
Our Recommendation for Mum & Dad Business Owners With High-Value Assets
- Construct your company in the manner described above.
- Purchase your high-value business assets, such as motor vehicles, intellectual property, and equipment, through a separate entity so that the shareholder can continue to be the spouse who is not involved in the firm.
- This time around, the director’s spouse is the one who is not involved in the firm.
Our Recommendations for Mum & Dad Business Owners With Investments
- Follow the above steps.
- Make use of a self-managed superannuation fund (SMSF) to make investments, or purchase your private investments in another separate company as recommended for high-value assets.
- Make sure that the spouse who is not involved in the business has all of the assets and investments in their name so that they are protected from any risks associated with the firm, including director obligations.
Final Thoughts
You need to begin protecting your assets as soon as possible to safeguard yourself against a bad beginning to your trading career; asset protection is not just for the wealthy. It can be the difference between your family home being protected and not being protected.
There are a number of structures that can be used to protect your assets.
A trust that is overseen by a corporation has several advantages, including those associated with the trust’s role as a business entity.
On the other hand, if the individual is the subject of a legal action, the creditor may go after the individual’s assets, which may include ownership of the shares of their company. The organisation ought to be structured as a discretionary trust with a corporate trustee.
This will enable profit distributions to be made to the individual who will benefit from them most from a tax perspective.
The spouse who is not actively involved in the business should be the only owner of the shares of the corporate trustees.
Bookkept is looking for an accountant to assist you with both your personal and business income tax.
Use a self-managed superannuation fund (SMSF) to make investments, or purchase your private investments in another separate company as recommended for high-value assets.
Please give us a call at the number (03) 8568 3606 if you are looking for an accountant or if you are considering whether or not it is time for you to make a change in the structure of your business. Bookkept is well suited to assist you with both your personal and business income taxes, having accumulated more than 10 years of combined expertise working with a wide variety of clients over the course of their history.