This guide outlines four ways to structure your business to protect assets securely.
Embarking on the journey of starting your own business is a thrilling yet daunting endeavour. It involves extensive research and decision-making. Among the crucial choices you’ll face is determining the structure of your business to safeguard and protect assets, both personally and in relation to your new venture.
4 business structures to protect assets
There are four primary ways to structure a business, each offering its own benefits and drawbacks based on your individual and business requirements. These structures are:
Sole Trader
Opting for a sole trader setup can be highly appealing for small business owners. This approach allows you to establish your business as an individual, without the need for complex structuring. By choosing this format, you can keep startup costs to a minimum and avoid the expenses associated with a formal business plan required by corporations, partnerships, or trusts.
Additionally, there are various tax advantages that can contribute to the success of your venture, including favourable treatment of capital gains taxes.
However, it is strongly recommended to consult a tax professional to fully comprehend the tax advantages of being a sole trader, and the implications if you want to protect assets.
It is important to note that as a sole trader, you will personally bear the entire liability of your business, including debts and contractual obligations. This means there is no legal separation between you as an individual and the business itself.
Partnership
A partnership is a relatively less complex business entity compared to corporations or trusts. While it requires more consideration than a sole trader, it is still simpler to set up than other options. Establishing a partnership entails moderate legal complexity, and seeking appropriate legal advice during the formation process may be necessary.
A partnership allows you to collaborate with another individual and share responsibilities, costs, and liabilities. However, it’s crucial to remember that a partnership is not a separate legal entity. Therefore, partners remain personally liable for the partnership’s actions, which can impact your moves to protect assets.
Unlike sole traderships, partnerships have the option to include limited liability partners. These partners have their liability limited to the extent of their contribution to the partnership. This limitation significantly reduces their personal liability but often translates to limited control over the overall management of the business.
Company
Most small businesses opt for the structure of a Proprietary Limited company (Pty Ltd), which means that the ownership of the company is limited to 50 non-employee shareholders. This structure offers the advantage of limited liability, creating a protective barrier between you and external parties and also helping you protect assets..
Choosing a company structure:
- Facilitates easy access to expansion opportunities through collaboration with like-minded investors.
- Enhances credibility with banks, financiers, clients, and suppliers, thanks to the Pty Ltd label.
- Unlocks access to exclusive contracts reserved for companies.
- Provides personal liability protection for owners.
- May potentially reduce tax obligations.
- Offers tax offsets for certain activities, such as research and development.
- Simplifies succession planning as the company continues to exist until it is wound up.
Trust
Structuring a business through a trust is the most intricate method. Any form of business organised as a trust necessitates the expertise of a solicitor and other financial advisors. Establishing a business via a trust entails the following steps:
- Appointment of a trustee.
- Identification of trust beneficiaries.
- Drafting a formal trust deed.
- Potential registration with the appropriate regulatory body.
- Determination of the trust’s revocability or irrevocability.
Similar to a company, a trust is a legal entity that offers limited liability through the presence of a corporate trustee. Choosing to structure your business as a trust should not be taken lightly and should always involve legal counsel.
Conclusion
So, which structure is the best to protect assets? This will vary depending on your circumstances, but typically as a business scales, a trust or company structure will be most appropriate. Because these structures create a legal separation between you as an individual and the business, it limits your personal liability, and protects your assets.
Rolf Howard is managing partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage. Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fund raising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.
