Business owners often ask me what they can do to protect their assets if their business runs into trouble. Unfortunately, all too often this question is asked when it’s too late. By the time they ask, trouble is already upon them e.g. they are being sued for failure to complete a contract on time or are subject to a product liability claim.
Once trouble has struck, it is usually too late to take any protective steps. Any attempts at asset protection at this point in time will appear as though assets are being shifted to evade creditors. This will result in courts allowing the creditors to trace the assets and claw them back.
So how can you protect your assets?
Creating and implementing a comprehensive asset protection plan will help to prevent or at least significantly lower risks by shielding your business and personal assets from potential creditor claims.
Ideally, the legal strategies that underpin an asset protection plan will be put in place when a business is starting up (or if the business is already running, as soon as possible). Once in place these strategies will assist in deterring potential claimants and preventing the seizure of assets after an adverse judgement.
It is important to put your asset protection plan in place as soon as is feasible as the longer its existence, the more robust and effective it will be.
There are a number strategies that can be employed when protecting your assets. Today we’ll take a look at two specific measures you can take:
- Keep your personal assets away from your business
- Create a two-company structure
Keep your personal assets away from your business
As far as possible, keep your personal assets (e.g. as your home, other property, savings, investment funds and personal effects) away from the business. You can do this by putting your business into a separate legal entity such as a company.
Even then, you are sometimes forced to put your personal assets at risk. For example your key suppliers may demand personal guarantees, but as far as possible you should resist giving these to anyone at any time.
However, in the event that you are seeking bank finance for working capital or a business expansion, you will invariably be required to give the bank a mortgage over your house. Perversely, this in itself can provide protection from other creditors, because if they know you have a substantial mortgage with the bank, they are less likely to dedicate time and money to chasing whatever equity the bank may leave for them.
Where you can make a real difference is in protecting your key business assets. The ideal way to do this is to create two companies for your business.
Create a two-company structure
Using holding and operating companies is an asset protection planning strategy that helps to limit liability risks in your business structure.
An optimal business structure consists of the following two entities:
In this type of a structure the holding company simply licenses the operating company to use the assets. It does not otherwise carry on any business, therefore cannot get into financial difficulties.
The operating company, on the other hand, reaps the benefits of using the assets, but does not put them at risk in day-to-day operations. So if the operating company has problems paying its suppliers, or is sued by an aggrieved customer, the worst-case scenario is that it ceases operations whilst the assets remain safe in the holding company, so you still have them to start again.
Whilst it is ideal to set yourself up this way from the outset, in many cases this does not happen. Most business start-ups don’t have much in the way of assets to protect, so this is not a high priority for the business owners.
For this reason, many business owners start to think about protecting their hard-won assets only after their value has become significant. At this point in time, creating a comprehensive asset protection plan is possible, but can incur substantial transaction costs such as stamp duty or capital gains tax consequences of moving assets into a new “ring-fenced” entity.
Even then the costs may be justified. At the very least, it is worth acquiring any new assets in a creditor-remote entity. As time goes by you will be progressively better protected against potential business disaster.
If you would like to know more or need any assistance, feel free to contact us at Antcliffe Scott, we’d be more than happy to help!