Asset Protection Basics
If you are about to buy, or are in the early stages of operating a new business, you should be careful to choose the most suitable ownership structure.
Often, all too little attention is given to this important issue. Once you are locked in to a certain structure, it can be difficult and costly to change later, so it is important to get it right from the start.
There are a number of considerations, including:
income tax minimisation
flexibility to allow more parties to become owners later on
capital gains tax consequences on selling the business
weighing up the relative administrative costs of the different structures.
Asset protection should also be a major factor. This is about designing your business structure so that debts and claims relating to the business are, as far as possible, kept separate from your other valuable assets.
For example, you might choose to hold your business in a family trust (to enable income streaming to minimise tax) but hold the freehold for the premises from which the business operates in another entity.
Thus, if a customer successfully sued you for injuries caused by a product you sell, and their claim exceeded your insurance limit or fell within one of the many exclusions which insurance policies contain – then your freehold would be protected or “quarantined” from their claim. Your business might suffer, but you would not lose everything as a result.
Asset protection can also protect against insolvency more generally, although the benefits can be partially undermined where personal guarantees are given to banks, landlords and suppliers.
Another common example of structuring for asset protection, for more sophisticated businesses with valuable intellectual property (such as a trademark or patent), is to own that IP in a holding company or trust, which then licences the use of it to the main operating entity.
Again, if the operating entity is sued or goes into liquidation, the valuable trademark or patent is protected.
You should consider, now rather than later, whether you and your business will benefit from asset protection.
The longer you leave it, and the more valuable your assets become, then the greater the capital gains tax and, in the case of land, stamp duty, you will have to pay to transfer those assets.
Feel free to give us a call if you would like to discuss asset protection and structuring solutions
Author: Cathy Drake