What's the best structure? Episode 2 - Asset protection

The company generally provides the best asset protection but there are instances where the 'corporate veil can be lifted'. How about trusts?

Tax Snap available from Resources tab.

Next episode: Episode 3 - Selling your business

Date of published: 1 September 2021

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TRANSCRIPT

Asset protection, asset protection. Pretty quick and easy. It's quick and easy. 

Sole trader 00:03

Sole trader. There is no asset protection, the business's assets and your assets are the same thing. If your a business gets sued or goes bankrupt, all of your personal assets are liable to pay those debts. So if you don't pay creditors, if you owed money from employees, super and all sorts of things, they can sell your house to pay for those things. 

Partnership 00:23

Yep. Same with the partnership, exact same of the partnership, except your each and joint and severally liable. So it's not, it's not limited to your percentage. It's if you have all the assets, they can take all of yours to pay for the whole debt, even though it's 50 50. 

So if, if Dan and I are partners in a partnership and I go off and lose it all gambling on Essendon winning the premiership, in 2021, because we will. I actually have no assets because I've, I've got a history of gambling in Essendon winning premierships and losing, then then they will take all of Dan's assets to pay the debts that I foolishly incurred to to gamble on Essendon winning the premiership.

So yeah, that is, that is a risky one. If you don't trust your partner, it's a possibly even more risky than a sole trader. Yep. I agree. 

Company 1:06

The next one up is the company. Now it provides, you know just naturally by itself, the most legal protection, because it is a separate legal entity. So it's debts and its problems are its problems, not yours, not your assets.

There are certain circumstances where they can come after you, you know. They call it lifting the corporate veil and come after your assets. There is. But that's mainly, if you haven't followed your director duties, you know, paid super, paid tax and GST and things they can. Lodgements up to date. If you haven't been lodged in these things up to date, then they can come for your own personal assets, but that's very limited.

Generally, when a company goes bankrupt, it goes bankrupt. Your own assets are protected. Now we're going to save you from the bank coming after you, if you have a loan with the bank. Because banks aren't stupid, they're going to secure that against you and your personal assets. Yeah. But potentially it will give you a lot of safety in the event that someone goes very wrong in your business. 

Ring fence certain assets 2:01

So the, well, the part of, of asset protection is often people might have a couple of companies. Where they'll have particular assets, patents intellectual property held in one company . Yeah. Which then licenses those or lease them to a trading entity. So if something happens to that trading business, your assets can still be protected.

So a lot of people do structures like that which is all about asset protection, but the reason why it's the same thing, a company is a separate legal entity. 

Trust 2:28

Yep. So next one trusts. Now a trust by itself, isn't a separate legal entity as such. But if you set it up correctly with a corporate trustee, it then does have that legal separation from you. So it then has a similar function to just having a company. So the business has assets that it's and your assets are yours.

Yep. It's a little bit more complicated again with beneficiary accounts and things like that. But with the complication probably comes a little bit of security because it just is complicated. Yeah. So, so yeah, there is definitely a divide between you and the trust. It, it achieves the exact same thing in my opinion as the company.  

Conclusion 3:09

So so yeah, asset protection wise, we've got clear standouts company and trust with a corporate trustee, essentially a company behind a trust. Correct.