What is asset protection & why do I need it as a business owner?

Bydigitalconversations

What the heck is asset protection and why should you care?

You might have heard the term but don’t fully understand what it is or the implications of it.

It is super important if you own a business that you understand what it is and the implications of it.

Basically, asset protection is the legal process of shielding your assets from creditors and lawsuits. This is why having the right business structure is so important. Your business structure may or may not protect you from liability. A common issue is protecting a major asset like your home.

The goal of an asset protection plan is to prevent or significantly reduce risk by insulating your business and personal assets from the claims of creditors. Unfortunately, most small-business owners are unaware of all the potential risks that can harm their business and the options available to protect themselves.

Two types of claims can arise: internal and external.

Internal claims arise from creditors whose remedy is limited to assets of a particular entity, such as a corporation. For example, if someone slips and falls on your property

External claims can extend to your personal assets. For example, if the same corporation owned a truck that you negligently drove into a crowd of pedestrians, the injured could not only sue the corporation but also you and satisfy any judgment from corporate assets as well as your personal assets.

The fact that your personal assets can be ceased for business matters, is one of the biggest reasons you need to make sure your assets are protected.

Here is a real-life example for reference

Peter owned a franchise operation in the food sector which after some good years of profitable trading had started experiencing more difficult trading conditions.  His cash flow started to deteriorate and he was having difficulty keeping his PAYG and GST obligations up to date.  He did make sure he paid his employees’ super on time as he was very loyal to his employees.  Matters came to a head when the franchisor put more obligations on the business and he was forced to close.  As with many businesses who can’t pay their BAS he had fallen a few months behind on his lodgements.

Peter’s business was run in a company structure for asset protection purposes.  However, as his BAS lodgements were more than three months behind the ATO was able to issue a Director Penalty Notice making him personally liable for the BAS debt and putting his personal assets at risk, including the house he owned with his wife Kylie.  Fortunately, Peter & Kylie had gifted the equity they held in their house to their Family Protection Trust so it was attractive for the ATO to pursue.

Peter was advised to liquidate the trading company before the DPN became fully effective so was able to make his personal assets unavailable to his sole creditor and so avoid bankruptcy.

Why do you need it if you own a business?

There are very real practical scenarios that happen every day in business that can potentially impact your assets.

In what instances might you need to protect your assets?

  • Divorce from spouse
  • Legal action against you or your business
  • Avoid costly probate if you pass away
  • Creditor claims
  • Workplace accidents
  • insolvency

There are many reasons to work with an accountant that help you with asset protection:

  • Your accountant can help determine what your assets are. 
  • They understand the system.
  • An accountant with experience in the field will be able to set up an asset protection trust.
  • An accountant can find tax deductions related to your asset protection. 
  • They can guide you from unwise practices such as building wealth in your name.
  • Your accountant may advise you to take out one or more

If you don’t think your assets are fully protected, let’s change that.

Now you have a basic understanding, schedule a time to chat with me, and let’s get you protected.

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