If your business is worth protecting,you will have a good risk management system in place. This might mean you insure your assets for external risks like theft, loss or damage. It might also mean using well-drafted agreements to protect your commercial interests or limit liability. But what if someone sues your business?
Are you exposed if your insurance policy won’t cover you? We look at some common ways of shielding business and personal assets against claims.
What is asset protection?
With clever asset protection you can safeguard your assets against litigation or unnecessary taxation. Most mechanisms will involve moving business assets from the trading entity to a re-lated company on trust, which shields them from claimants and taxation.
Much like keeping valuables in a safe, a secure and separate holding company can be used to store the key assets of the business – including real property, IP, leases and cash reserves – away from the business. Your solicitor can draw up agreements that simultaneously transfer the key assets to the holding company and then license them back to the business (usually for nominal consideration). Once this structure is in place, if your business is sued by anyone – a customer, an employee or third party – key assets are protected because they are not owned by the business being pursued in the claim.
Use of trusts
We will often recommend a trust as the most suitable entity to own the assets. The trust structure adds an additional layer of security. A trustee has legal control, which is legal title only, while the beneficiaries – you and your business-are entitled to the assets and profits of the trust. The basic function of a trust is to separate control and ownership. A trust structure can provide effective asset protection and can be used to distribute company profits in the most tax effective way.
Directors in high-risk positions should take steps to shield their personal assets from potential claims, given the expanding – and often uninsurable – personal liability for breach of director duties. Transferring personal assets such as the family home to a spouse or trust is a common way of reducing personal exposure to claims. If you have taken out a lease or applied for business finance, you will be familiar with the concept of the personal guarantee, where you personally agree to meet any losses arising out of an agreement. The same principles apply to risk reduction in this scenario.