Asset protection is a relevant consideration in the establishment of any business.
Effective asset protection strategies can limit, and in some cases, avoid liability for individuals who are carrying on a business.
Commonly, businesses are conducted via a company or trust structure. The general rule is that shareholders of a company, or beneficiaries of a trust, are not responsible for the liabilities incurred by the relevant trading entity. There are exceptions to this general rule. For instance, directors who are also shareholders of a company may be personally liable for unpaid tax or superannuation liabilities or if the company is trading whilst insolvent.
Even so, individuals who operate a business via a company or trust will be in a much better position than if they were carrying on a business in their own right as a ‘sole trader’.
Sole traders are personally liable for all the debts of the business.
Another asset protection strategy is to ensure that business assets are held by a separate entity to the one which is carrying on the trading activities. This will ensure that these assets are protected from creditors of the trading entity. For example, it is recommended that real estate be held in a separate trust (in order to maximise tax benefits) and that the trust lease the real estate to a company which is carrying on the trading activities. In this way, the real estate will be protected from creditors of the company.
Why Is Asset Protection Important?
Effective asset protection strategies can also protect business assets in the event of a family breakdown.
Everyone should have a current up-to-date properly constructed Will. For this you would see a legal practitioner experienced in Will preparation. Trusts and the assets within them do not form part of your estate upon death. Likewise, self managed super funds do not form part of your estate. Therefore the beneficiaries of the trust or the self managed super fund are the only ones entitled to the assets. In this manner, whilst you are living you can direct your assets to those you consider should receive them.
There are three very important people who are virtually impossible to protect from:-
- the bank – if they have a mortgage over your property;
- a spouse or de-facto; and
- the taxman.