A common misconception is that when you establish a business, any failure it incurs will be contained within this model. That is to say, your personal assets will not be impacted or seized should corporate insolvency occur.
However, as we recently covered, this is not the case. There are many occasions where your personal assets can be folded in with the company This means that anyone involved in running a business would do well to have asset protection strategies in place – either from the beginning of the company, or as soon as possible afterwards.
At Cactus Consulting, we can help you structure a company to minimise risk exposure and potentially prevent your personal assets from becoming collateral if the business encounters financial difficulties. But what exactly are these assets that might need protection?
The family home
Statistics on home ownership in Australia are difficult to pin down for the present, but the last total count comes from the 2011 Census, courtesy of the Australian Bureau of Statistics. It noted that there were 9.1 million homes across the country, and 67 per cent of households either owned their home outright, or were paying off a mortgage on it.
This is likely to have increased in the years since, as historically low interest rates encouraged more home buying.
When a company enters liquidation in certain circumstances (such as when illegal phoenix activity occurs), the family home can be one of the first assets put up to resolve outstanding debts. According to CoreLogic RP Data's monthly indices up to the end of June, median house values range between $360,020 (Hobart) and $1,079,060 (Sydney). Depending on where you are and what you own, this can be an incredibly valuable asset that you need to hold onto.
Obviously, the family home is not the only asset that you may own. According to the ABS, we collectively had 18.4 million vehicles registered by January 2016. If your company goes under in a manner which leaves your personal assets exposed, then motor vehicles can be one of the first things to go.
There is a limit to this, however. The Australian Financial Security Authority (AFSA) points out that if a vehicle is valued at $7,600 or less, then it may be retained. This is the equity in the vehicle though, so factors in how much of it you have paid off, rather than its market value.
The legislation around receiving an inheritance (or deceased estate) is different between every state and territory, so the acquisition of this should be checked with your relevant government authority. However, nationally, this inheritance can be claimed by a trustee if your company goes under in a certain way.
For example, if you do not perform your duties as a director, or the company's assets cannot cover its debts, then any deceased estates you obtain either during or before the corporate insolvency can be used to make up the shortfall.
The same applies to lottery winnings, and shares or investments in your businesses.
Your income (to a point)
Your ability to earn is going to be your way forward through a corporate insolvency. But above a particular threshold, your income will also become something that a trustee can lay claim to. This increases the more dependants you have, ranging from $54,518.10 (no dependants) to $74,144.62 (more than four).
Income protection strategies may assist you here, but as these are such delicate arrangements it is best to seek out professional pre-insolvency advice before making a decision on how to protect your assets.
Your most precious items
One category listed by AFSA as an asset that trustees can claim is "sentimental property". This could be family heirlooms or jewellery with significant value, or even books and other household items of significance.
The trustee makes a final decision on which of these will be claimed to pay off debts. Should your company be run poorly and you are liable as a director, these could be the next items on the chopping block.
How do you protect these assets?
If a business faces financial difficulties, it is more than the company which could be lost.
These are far from the only things you could potentially lose. Superannuation benefits, plant and equipment that you own and funds owed to you are just some examples of what else you can lose.
Clearly, if a business faces financial difficulties, much more than the company could be lost. Protecting your personal assets is crucial for anyone responsible for a business. Because everyone's personal assets are going to be different, the specific protection strategies that are used will vary.
This is where pre-insolvency advice from the team at Cactus Consulting can help you structure a business and your assets in a way that can save you both emotional and financial pain.