Asset Protection

Oct 20

In the excitement of commercialising your dream, or buying a business or property, you may overlook the importance of getting your structuring right. You've heard of sole traders, companies, trusts, partnerships and joint ventures, but what are they, and which is the right fit for you and your plans?

General Manager James Blevin from Argon Law shares two examples of how it can go wrong.

Two years ago, a husband and wife started a business. Even though both were involved, it was a new idea and they decided to run the concept through a sole proprietorship structure, using the wife's ABN.

This year they bought a home as joint tenants, with equal shares in the property. All seems to be going well, but then it all turns.

A disagreement arises and a customer sues the business for damages caused by a faulty product. Because the wife owns the business, and there is no separate legal entity, all her personal assets could be at risk, including her share of the family home.

The couple could have avoided this through better structuring.

In example two, two friends start a business together using a partnership structure. One contributes expertise and the other assets and cash.

Once again, the business starts well but competition soon reduces profitability. Partner A is aware of this while Partner B is not. Within a year or two, the partnership is slow paying its bills and a creditor attempts to recover debts from the partnership. Because a partnership is not a legal entity in its own right, the two friends, or partners, are jointly and severally liable. But Partner A has no assets, so the creditor attempts to recover the entire amount from Partner B.

As in the first example, Partner B could have avoided this outcome with better structuring. Usually an effective partnership structure involves incorporating each partner as a company.

There you have it. Two very simple examples of the very costly price of bad structuring. If you're starting or buying a business, buying a property, or looking to restructure, come visit us at Argon Law. We'd be happy to help.