Is Your Accountant Is Overlooking Your Protection?
Times seem tougher at the moment. More businesses seem under the pump, making losses, not being paid by customers, higher debt and staff fluctuations.
Most accountants will discuss the major points of asset protection (ie protecting your home or personal assets in case of business failure), by setting up structures such as companies and trusts. But the good work can be undone by the most simple of oversights. Below is my top three simple oversights that leads to business owners jeopardising their homes.
- Whats in a name
Do you have a directors loan on your business balance sheet? Have you for tax purposes “borrowed” money from the business instead of taking it as a wage or dividend? You may not think you need to pay this money back in the ordinary course of business- but if your business fails, then rest assured the administrator will want it paid back.
Its dangerous to name your accounts “Directors Loan” or “Shareholders Loan”. You leave yourself open to attributing the loan to the entire class of people such as ALL directors or shareholders.
Consider the example where a husband and wife own a company. Both are directors, but their home is in the wife’s name. If a $100,000 “Directors Loan” exists where the directors owe the company money, then theoretically, creditors could take the home.
But, by naming the loan “Loan to Husband” you are being specific and may protect the personal home asset from attack. We would recommend a loan agreement go along with that to really add extra protection. Getting the account name right might prove vital in saving your home.
- Be on time
OK, so the business may be doing it tough. Maybe you cant afford to pay your BAS. Its imperative you lodge your BAS on time to protect your personal assets.
Legislation provides that if BAS is lodged late (over 3 months) the ATO can come after directors personally for any unpaid PAYG Withholding on wages. Given that the ATO reduces debt owed to them by applying it against unpaid GST first, the PAYG Withholding figure tends to add up! But if the BAS have been lodged on time and the ATO have no issued a Directors Penalty Notice, then the Director may not be liable for the PAYG Withholding. This may be an enormous win if you need to put your business into administration. It may be the difference in saving yourself from personal bankruptcy.
- Do you guarantee it
Do you know what you have personally guaranteed as a business owner/ director? You would be surprised to know what you might have signed without thoroughly checking your personal liability, that causes you to be exactly that, personally liable.
The types of things you might have accidentally signed a personal liability for include (but not limited to):
- Leases on premises
- Vehicle and other loans
- Contracts with customers
Sometimes acting as guarantor is the only way deals can be done. Its understandable. But, you don’t have to commit everyone as a guarantor. I recommend considering your options every time you potentially sign a personal guarantee. Some solutions include:
- Can a higher deposit remove the necessity of a personal guarantee?
- Can you put the guarantee in the name of the party with the least personal assets?
- Can a bank guarantee be used instead?
- Can you negotiate no personal guarantee?
- Are there other suppliers who don’t require a personal guarantee?
Keep a detailed list of all personal guarantees you hold. If business is struggling, then making sure you understand the position of these creditors may be the difference between you being made to pay personally or having those debts extinguished with the collapse of the business.
No one wants to see good people go unpaid. That’s not the point and personal asset protection should only be used as a shield, not a sword to attack your creditors with. Businesses fail all the time. There is much worse in life than that. But, where you can protect your assets legally, you should do everything in your power to do so. Because you cannot help others, until you’ve helped yourself.