Asset Protection Example

As an example, we show you below a real-life scenario which could have easily been avoided had the correct advice been sought.

Austin & Jane are a couple. They own their family home jointly and have a small debt to the bank. They decide they want to borrow some money and buy a café. Without advice, they simply buy the business in what we call a Mum and Dad partnership.  Cheap to establish and operate.

Five years or so goes by and trading is poor due to competition in the area. Debts are mounting with suppliers and the ATO but they persist and the problem gets larger. They are working long hours and decide it’s not worth it. They walk out of the business and leave a trail of other debts amounting to $ 100000 (to suppliers and the ATO). Austin and Jane are of the opinion that since the business has ceased, the $100,000 doesn’t need to be paid.

However that’s not the case. A simple partnership means that both of them are liable for the $100,000, and if they don’t pay it, someone may take action to recover it. Because Austin and Jane have good equity in their family home, a savvy supplier or the ATO will proceed to bankrupt the both of them and recover the money.

What should they have done?

• Well firstly, consult with an accountant that understands asset protection. Then what they would have heard was:
• Establish a company / trust to buy the business
• Determine the correct director
• Determine the correct shareholder
• Transfer the home to the correct spouse.

Now, if they walked out, it’s more than likely that:

• The company / trustee may be liquidated but it doesn’t own anything other than a failed business.
• The director may be sued, but he doesn’t own anything. The house is not in the name of the director.
• The shareholder has no exposure as a passive investor.

Whilst we don’t encourage our clients to deliberately go out there and not pay creditors, we do encourage them to set themselves up in such a manner that will preserve their assets in the event that the business fails for reasons beyond their control.

BOTTOM LINE:  Get advice at the very start regarding your structure. It can be too late to do anything later on.

With our extensive knowledge and expertise, we can help you with asset protection in Melbourne. Arrange your free no obligation meeting.