How to protect your personal assets from legal action against your business
As a soloist you can’t afford to overlook legal risk. Put a plan in place to protect your family home and personal wealth before a claim is made against you. Once you are being sued, it’s already too late.
In 2012 the High Court awarded a shopper $580,000 for slipping on a greasy potato chip a food court floor. The High Court said the business owner was negligent as they should have inspected the floor every 15 minutes. This case highlights the significant legal risks business owners can face because of misfortune.
We live in a culture of blame where business owners are regularly the subject of negligence and other legal claims. Behind the US, Australia is probably the second most litigious society in the world. Even minor accidents are held to be someone else’s fault and can give rise to legal action. There are scores of plaintiff lawyers advertising ‘no win no fee’ arrangements that will try almost anything on. If you are a business owner, that makes you a target.
What is at risk in the event a claim is made against you?
Only your family home, car and everything else of value that you own. But it doesn’t need to be that way. You can take steps to protect your personal wealth from the liabilities of your business. This is called an asset protection plan.
In my first instalment on this topic I’m going to discuss a few effective strategies commonly used for safeguarding your property and possessions from creditors and litigants.
"Establishing a family discretionary trust will provide an excellent level of protection for most personal assets."
Transfer your family home to your spouse
As a sole trader or company director, you can be exposed to liability for your business activities which can put your family home at risk. One of the most simple and effective strategies you can put in place is to transfer important assets like the family home out of your name or joint names and into the name of your spouse only. There are special stamp duty and CGT exemptions for transfer of land between spouses so this need not be costly to put into effect. Beware that this will not work if you are doing this to avoid a potential claim of which you are already aware. The reason this works is that if you have little personal assets in your own name, you are less likely to be a target for creditors and litigants.
Put business assets in a business entity and personal assets in a discretionary family trust
In the same way that you should operate separate bank accounts for your business and personal affairs, you need to consider the most appropriate use of legal entities like companies and trusts to hold your business and personal assets. As a general rule, business assets belong in a dedicated business entity like a company, and personal assets (excluding the family home for CGT reasons) are safest in a discretionary family trust. Professional advice is key here as legal entities can be complex and have significant taxation and regulatory consequences.
Keep long-term wealth in superannuation
Not only does superannuation provide great taxation concessions and keep your retirement savings safe from your desire for short-term gratification, it also provides effective protection from claims made against you. Funds held by your superannuation trustee will generally be untouchable by creditors and litigants. The limited exception to this would be if you were to make an unusual transfer in anticipation of a claim being made against you. Further, if you operate a Self-Managed Superannuation Fund you may even purchase your business premises through the fund, thereby protecting the premises against claims made against the business.
The best time to seek advice and get protected is now
It can take a lifetime to build wealth but only a moment’s indiscretion or misfortune to lose it all, especially in today’s highly litigious society and culture of blame. While there are DIY options for asset protection planning such as creating legal entities like companies, trusts and self-managed superannuation funds, there is no substitute for professional advice specific to your personal circumstances. Put a plan in place to protect your family home and personal wealth before a claim is made against you. Once you are being sued, it’s already too late.
In my next instalment on this topic, I’m going to discuss additional factors to consider including the corporate veil, directors’ liability, liability insurance as well as the ethics of asset protection.