Why Risk Your Hard-Earned Wealth?
I will never forget the time I witnessed the owner of a failed business tell his wife they might lose the family home. It was made worse by the knowledge that this wouldn’t have happened, had he structured his business the right way.
One of our roles as trusted business advisers is to help our clients with Asset Protection. It’s not about hiding assets or acting unethically to avoid financial responsibility, it’s about using sophisticated and legal techniques to ensure you are in the best possible position, should the unexpected happen.
What Could Go Wrong?
The short answer; anything.
Unfortunately, life in business involves taking calculated risks and even the best-laid plans can go wrong. A project or business relationship may not proceed as expected, leaving you financially exposed and open to litigation that is costly to defend. A sudden market change could leave your business with large debts and revenue problems when customers are taking longer to pay their bills (if they can pay them at all).
A business in crisis can quickly become unable to pay creditors. When creditors seek to recover their cash, they will naturally investigate their right to sell assets associated with the business owner. This has the potential to snowball into often catastrophic scenarios; from which many never recover financially or emotionally. In many cases, relationships are the first causalities.
At PKF, our advisers coach our clients to, “Expect the best but plan for the worst.” It’s part of guiding our clients to design their Future of Choice. An Asset Protection Plan is vital for every business owner.
What’s Included In A Good Asset Protection Plan?
Any good plan will use a careful combination of strategies – maintaining adequate insurance cover, reducing the possibility of being sued, and so on. A key part of any plan will be to own assets in a protected entity structure, and ensure that the people with risk do not own any assets.
In the case of a business, this means the business is carried on in one entity and the business assets held in another entity, or at least the business premises being held in a separate entity, allowing the asset-owning entity the ability to rent the assets to the business entity.
Personal assets should also be separated from business assets so that if the business gets into financial difficulty the personal assets are not at risk. Similarly, if an individual gets into financial difficulty the business assets can be protected if the individual does not own them.
A good Asset Protection Plan will define the balance between:
- Cost versus risk; and
- Conflicting priorities.
For example, the main residence exemption from capital gains tax is generally only available to individual property owners, so a choice to hold that property in (say) a trust would forego the tax exemption.
These need to be weighed carefully, with the structure being fashioned in line with the business owner’s evaluation of risk. Every person’s circumstances are different so there is no ‘one size fits all.’
The key to developing an effective Asset Protection Plan is to do it early, and seek the right advice. It is best to implement a plan while everything is going well – not to wait until financial difficulties are imminent. Effective planning can greatly increase the favourability of outcomes for your business, your family and yourself.
Please contact your PKF Business Adviser if you need to discuss this important subject further.