An extremely common conversation with a business owner will commence with “I have been looking into something different… should I set up a new company so that if it does not work out all my existing assets are protected?”
The short answer is almost invariably yes, but the conversation that flows reveals a more complicated and nuanced version of what it takes to ensure your assets are protected. The mere legal separation of an asset or a business activity will clearly provide some benefit but quite often not to the standard that business owner had anticipated.
Here are four key questions you should ask yourself in determining how well your assets are protected are:
How much do I owe the ATO? And what for?
The Tax Administration Act was extended in February 2020 to make directors of companies potentially personally liable for overdue Superannuation Guarantee, Pay As You Go Withholding, Goods and Services Tax, Luxury Car Tax and Wine Equalization Tax.
Do you have any assets funded by Hire Purchase or Chattel Mortgage?
Any Hire Purchase/Chattel Mortgage agreement is likely to require the debt to be secured by the asset purchased, meaning if you default the asset may be repossessed. Depending on the importance of that asset it may affect your ability to run your business or reduce the asset pool to pay out other creditors. Some agreements also require directors to provide a personal guarantee.
Do you have any bank loans or overdrafts outstanding?
All bank and non-bank lenders usually require a personal guarantee so if a default occurs the lender has the option of pursing directors personally.
Are any asset physically located on a client premises?
If your client enters administration whilst one of your assets is physically located in the clients premises then the asset may become property of your client’s administrator. Having legal title over the asset will not be sufficient in recouping the asset.
The good news is that there are strategies that a business owner can take to reduce your risk and provide further asset protection.
PKF is regularly engaged to assist with asset protection. If you wish to learn more, please get in touch.