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Risky business: companies and trusts

5 May 2015 |

There are many risks associated with running a small business, but the financial impact of some of these can be reduced by taking out insurance. There are other risks that can result in the personal assets of the business owners being attacked in the event of a business failing or as a result of legal action.

A business owner or owners’ personal assets can be attacked where the business is operated by an individual as a sole trader, by two or more individuals through a partnership, or by individuals acting as trustee for a trust. The main way a business owneer or owners’ personal assets can be protected is by separating them from the business by a company either owning the business or acting as trustee for a trust.

Q. Is it a good decision to add a new trust to an existing company, which is already trustee of an existing trust, so I can buy equipment for the business? The new trust would have some separation from the operating business that is taking the risks. The costs would be less than setting up a whole new company and trust.

A. You have raised another area of risk with regard to business assets being attacked in the event of legal action or liquidation. Where a business owns valuable machinery or land and buildings these can be put at risk if things go wrong.

The strategy that you are proposing is often put forward by solicitors that specialise in risk minimisation. Where a business faces above average operating risks, because of the type of industry it is involved in such as waste disposal or transport, it can make sense to have the business in one entity while the assets are owned by another entity.

The entity with the business assets leases or hires them to the operating entity on a commercial basis. In the event of an accident or the operating entity being sued the business assets are protected.

These entities could either be family discretionary trusts, unit trusts, or a company. To get maximum protection if trusts are being used a company should act as trustee for them. By having two trusts, with one operating the business and the other owning the equipment, maximum protection for the assets will not be achieved by only having one company acting as trustee.

Under trust law everything must be done in the trustee’s name including owning assets. By having the one company act as trustee for both trusts you will be putting the equipment at risk. In the event of the operating business being sued or going into liquidation the trust with the equipment could also be attacked.

You will need to weigh up the risks that your business actually faces against the extra cost of having a new company formed to act as trustee for the asset owning trust. Before taking any action you should seek advice from a lawyer that specialises in this area to make sure that you achieve the asset protection you desire.

 

This article was published in The Age on April 6th 2015.


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