6 Ways To Protect Yourself As A Business Owner

Running a business is hard work, as any business owner knows only too well. There are staff to think about, cash flow to worry about and the ongoing pressure of keeping work flowing in. However, there are some basic things you can do for your business to avoid unnecessary stress.

The top six things you need to do are:

1. Incorporate a Company

If you are not operating your business under a company or other limited liability structure, you are a sole trader and all liability rests with you personally. If you trade under a limited liability company, you have an added layer of protection from personal liability in many (but not all) areas.

2.   Have a Company Constitution

A constitution is a basic document setting out how your trading company is to be governed. It needs to be formally adopted by the shareholders of the company and filed at the Companies Office.  Without one, your company cannot cover its directors for any personal liability they may incur while running the business.

Personal liability can arise in several areas of your business, including in relation to health and safety obligations; certain employment obligations; payment of tax; and many other important areas. By adopting a formal constitution and signing a deed of indemnity in your favor (as a director of the company), you can pass-on any personal fines or other costs you incur to the company.

3.    Protect your Personal Assets

Many business owners set up a family trust and transfer their personal assets to protect themselves from commercial risk, which is a great start.

However, generally lenders require business owners and their trusts to guarantee the business borrowings and to grant security over their assets and the trust’s assets, which can effectively undo the protection the trust was set up to provide. Try to avoid involving your trust in your business affairs where possible, either by pushing back and asking the bank to justify its position, or better still – seeking a second competitive loan offer from another bank.

If you have put your family home into a trust, you also need to make sure you have fully “forgiven” its value (or otherwise fully gifted it to the trust). If you haven’t done this, the trust will still owe you a debt to the value of the property (or unforgiven amount). That debt is an asset that can be pursued by a creditor to meet your personal business liabilities. In a worst-case scenario, this could mean being forced to sell the family home to meet your personal liabilities. The solution is quick and cheap – you just need to complete some paperwork to formally forgive the debt.

4.    Avoid Granting Personal Guarantees

As a business owner, you will probably need to provide a personal guarantee to your bank. However, you can be diligent about who else you provide them to, such as suppliers of good or services. Often personal guarantees are imbedded in the fine print of the terms of trade you are asked to sign – check them carefully and don’t be afraid to question it!

5.    Enter Into a Shareholders’ Agreement

A shareholders’ agreement manages relationships between shareholders of the company; the organisation of the company; the ownership of the shares of the company; and how the shareholders are protected.

Without a shareholders agreement, a shareholder could sell their shares to whoever they want because there is no pre-emptive obligation to offer their shares to the other owners first, if they wish to exit the company (whether during their lifetime or on their death). There is also no mechanism in place for dealing with disputes that can cause irreparable damage to the business.

All this paperwork may seem like over-kill for a small business, but engaging in the process to ensure critical matters are discussed and agreed is crucial to your business continuity & planning.  It’s much better to take the time now to put a shareholders agreement in place, than to have to apply to the Court or, worse yet, liquidate the company to resolve a dispute or misunderstanding regarding a critical business matter that may arise in the future.

6.    Secure Your Shareholder Advances

When you put your personal money into your business, you are just as entitled to protection as any other creditor, by taking security over your business assets.

You can protect yourself in this way by registering a general security agreement on the Personal Property Securities Register. This will rank you ahead of unsecured creditors in the event of liquidation and, in some instances, ahead of other preferential claims or secured creditors. This means that, if the worst happens and your business goes into liquidation, you are more likely to get your money back out or, at least, some of it.

If you would like to discuss this advice further, please contact Wakefields Lawyers on 04-970-3600 or email info@wakefieldslaw.com.