Many people own their own businesses, and this is a mistake. At this point, you are probably asking yourself what I’m talking about.
People should not own businesses in their personal capacities. Businesses should be owned not by the proprietors of them, but by other people or entities who are separated from the day-to-day operation of the business. But how do business owners structure themselves appropriately?
Here’s a bit of an action plan:
For starters, the business name should be registered in the name of a company or other entity. Take for example, Callum’s Security Distribution. Now, Callum is a young go-getter full of ideas about how to turn his online security wholesale business into a multi-site, fully franchised operation. Callum intends to lease modest, yet comfortable premises in a semi-industrial part of the city and to throw his doors open for business.
Who should be the tenant named on his lease? Not Callum, that’s for sure. Why? Because at this stage, the business is Callum. If something happens to Callum – he is sued or he is in a car accident and is unable to keep working or pay the rent – then anyone chasing the business for money will chase Callum. If he loses that fight, he is a good chance to lose the business and the lease.
If, however, the lease is held in the name of a separate entity – let’s call his company Cal’s Security Stuff Pty Ltd – then even if the business is sued, Callum has shielded the lease from the firing line as best he can, and the business will still have premises from which to trade. If Callum is the sole director and shareholder of Cal’s Security Stuff Pty Ltd, then the company will take whatever steps Callum directs anyway, so he does not lose any control.
Similarly, the business name of Callum’s Security Distribution should also be held by an entity other than Callum. Ideally, Callum would have a separate company that owns the business name – that is, a company other than Cal’s Security Stuff Pty Ltd. Then, even if the company holding the lease is wound up or liquidated, the business name would be kept free from claims.
When Callum’s Security Distribution buys materials and supplies, it should do so under a name other than Callum’s private name. Given that the business name is owned by a company, that name could do. However, in an ideal world, a new company would be set up for that purpose. That company – let’s call it Doctor Callum Pty Ltd – would apply for credit, issue purchase orders and pay invoices on behalf of the business. If, for any reason, the business had insufficient funds available to pay creditors, then Doctor Callum Pty Ltd would be the entity sued for the money. At the same time, the business name and lease would be quarantined from that law suit.
At any time during its trading life, Callum should undertake an asset protection risk assessment. As part of that assessment, Callum should ask himself what is the most important thing he is trying to protect and who represents the greatest threat to that asset.
For example, some asset protection structures may protect assets from creditors, but not from matrimonial breakdown. Some structures may protect assets from matrimonial breakdown, but may not protect from claims brought against Callum’s estate after he dies. Once Callum has undertaken his full assessment, he can structure and plan his asset protection risk strategy. Let’s look at one of those.
Let’s assume that Callum has assessed his own personal bankruptcy as his greatest threat. To start with, Callum should not own any assets of significance. His house and car should not be in his own name. As a proprietor of a business, Callum’s assets are best held in the names of others (even though Callum will be advised that holding his home in the name of a company will have tax consequences which would not otherwise apply if the house was in his own name). If he can manage it, Callum should pay as much money as he can afford into his superannuation fund. He should not go crazy with contributions, but they should be significant and steady.
If, despite his best efforts, Callum is made bankrupt, he can prevent the money paid into his superannuation fund being clawed back by his trustee in bankruptcy. While this strategy is limited, it can be effective if it is put in place from the early days of Callum’s business and the contributions are for consistent and reasonable amounts.
Similar strategies exist if the risk assessment reveals matrimonial breakdown or claims against estates as Callum’s most pressing asset protection issue.
Giving some thought to those things now, will greatly assist Callum – and his business – in the long run.