If you’ve ever been at the helm of any venture, you don’t need me to tell you about the hard graft, long hours and sheer breadth of critical decision-making required to keep a business’ engine room firing.
As a business owner, taking adequate time to make every pressing decision can feel impossible. I’d like to put forward the case for prioritising protecting (properly and strategically) what you’re working so darned hard to amass, if you haven’t already.
As a lawyer, I’ve seen things go terribly, albeit avoidably, wrong when creditors or former spouses come a-calling on those who’ve left their worldly goods unnecessarily exposed; I have owned a small business myself, and have had to give deep thought to the very considerations I’m encouraging you to focus on.
While, you’ll likely need to involve an accountant and lawyer to assess your needs and structure the best asset protection for your particular circumstances, you can give yourself a great head start by thinking about the common key issues ahead of time.
First things first
The initial questions have to be: what assets am I protecting, and who am I potentially protecting them from? These fundamentals need to be considered in tandem with the type of business structure you’re operating under – typically, in New Zealand, you’ll be trading as a “sole trader”, in a partnership or as a limited liability company. All offer “pros and cons”, but can dictate quite different approaches to asset protection.
Of concern, I regularly come across business people operating as sole traders or in partnerships, who have no idea that, should things go belly up, their personal assets – house, investments, cars – could well be fair game to creditors. If that’s you, your solution could, for example, be establishing a limited liability company, or setting up a trust into which you can transfer and, thereby, protect your personal assets. Maybe you need to pursue both. Depending on your personal circumstances, it’s likely a contracting out agreement – colloquially known as a “pre nup” – may be an essential, too.
Many people think safeguarding assets begins and ends at setting up a trust. In fact, there are many tools and strategies that fit under the asset protection umbrella, and each can be vital in its own right, depending on your personal situation, together with the type, size and structure of your business.
Just by way of example, if yours is a limited liability company with other shareholders, do you have a shareholders’ agreement? If you’re in a trading partnership, same idea – do you have a partnership agreement? Anticipating a falling out with fellow shareholders or business partners isn’t nice, but it happens, sadly particularly in family businesses. It is much, much better to have decided what happens if things go pear-shaped before the fact, believe me.
Steer clear
There are specific and wide-ranging asset protection considerations, too, for sole traders. For example, are you reliant on one large client – could their unpaid bill pull you under? If so, have you agreed, and do you enforce, strict payment terms to safeguard yourself as best you can?
Increasingly, company directors are asked to sign up to personal guarantees with little real appreciation of their power and the personal risk they’re signing up for. It used to be that only banks insisted on personal guarantees, but now creditors are also jumping on the bandwagon. Writing about guarantees could be an article in itself. Putting it bluntly – do not sign one unless you have no other option, and be sure to take legal advice before doing so.
When it comes to trusts, there are few businesspeople for whom one isn’t advantageous. Regardless, better to find out ahead of time that having one is not necessary in your case, than to discover you would have really benefitted from a trust … after you’ve lost your assets. If you are considering a trust, or you have one already but haven’t put it through a health check of late, it’s time to call your lawyer. There have been recent landmark court cases that have attacked trusts previously considered safe. A new Trusts Act is soon due for implementation. It is designed to make trusts cheaper and easier to administer, but brings with it several new requirements that, if not met, could render non-complying trusts vulnerable.
Ensure you insure
Having owned a business through the Christchurch earthquakes, not surprisingly, I am big on insurances. Ensuring you have the right policies in place, and that you have pored over the fine print, are essential as part of your asset protection programme. Please carefully work through your insurances, both personal and business, and make sure you fully understand what your policies cover and, more importantly, what they do not cover. And, remember, wills and enduring powers of attorney are vital, too, in asset protection.
While every business person’s needs will be different, everyone needs to give asset protection proper consideration. Once you have the tailored tools and strategies in place, it’s imperative you follow up with regular health checks with your solicitor and accountant, particularly when you have big life changes – the start or end of a relationship or the arrival of a child, for example.
The law in this sphere changes as in many others. The key is, though, taking good, timely advice, knowing where the potential chinks are in your asset protection armour, fully understanding your options and making informed, timely decisions to best preserve what’s yours.