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Starting a business comes with risk. No matter how great you are at business, unexpected circumstances can get the best of anyone. Instead of diving headfirst with fingers crossed hoping it all works out, business owners need to be smart and carefully manage the risks – especially when it comes to their personal assets. When your personal assets are protected, the risk can be kept within the business.
There’s a few legal tips and tricks that can be used to protect your personal assets when starting a business – keep reading to learn them.
Choose A Business Structure With Legal Protection
One of the most important decisions you will make when starting a business is choosing the right business structure. If you are serious about protecting your personal assets when starting a business, consider registering as a company.
A company is a separate legal entity. It has many of the legal abilities of a person, such as having its own bank account, address, owning property, selling property, earning a profit, incurring debt or having ongoing legal matters. Due to this, a company doesn’t need to be attached to you personally in order to exist – it can do that independently from you.
The legal separation between you and your company gives you limited liability. Essentially, limited liability caps your legal responsibility to the amount of capital you’ve invested in the company. With this structure, personal assets are generally protected unless you have personally guaranteed business loans or engaged in wrongful trading.
Other business structures, such as a sole trader or partnership don’t have the same benefits as a company. Sole trader and partnership businesses are legally attached to the owner. As a result, the owner of the business can be at personal risk if the business goes downhill.
What About Trust Structures?
Operating your business under a trust can be an effective way to protect your personal assets. In a trust, the trustee controls the assets, but the legal obligations and liabilities may still fall on the trustee, depending on the type of trust.
Setting up a trust or registering a company involves navigating complex legal regulations. These structures are highly regulated and held to strict standards of ethical operation, so it’s important to seek legal assistance when registering your business under a company or trust structure. Additionally, a legal expert can provide valuable guidance on the ongoing legal obligations you’ll need to meet to ensure your company or trust remains legally compliant.
Say No To Personal Guarantees
When starting your business, it’s crucial not to put yourself at risk by agreeing to personal guarantees. Even with a company or trust structure, your personal assets won’t be legally protected if you sign an agreement that exposes them to potential liabilities.
It’s important to be wise in your dealings – lenders and suppliers may request personal guarantees to secure loans or credit agreements. Avoid giving personal guarantees whenever possible, as this can place your personal assets at risk. If providing a guarantee is unavoidable, try to limit its scope and negotiate the terms to reduce your personal liability.
This is where expertly drafted contracts prove beneficial.
Get Expertly Drafted Contracts
Expertly drafted contracts play a crucial role in protecting your personal assets when starting a business.
A well-drafted contract can include clauses that limit liabilities to the business entity, ensuring your personal assets are not at risk in the event of legal action or financial setbacks. Even if you are required to provide personal guarantees, an expert can help limit your exposure and prevent you from being over-committed or exploited by the terms of the contract.
Remember, poorly drafted contracts can leave loopholes that put your personal assets at risk.
It’s best to have a legal expert draft or review any contracts before signing them. An expertly crafted contract can limit your liability, clearly define the responsibilities of each party, and establish a formal process for resolving disputes – this can go a long way in ensuring your personal assets are kept out of business. Make sure all your business agreements, including contracts with suppliers, employees, and customers, are professionally drafted to provide your personal assets with the strongest legal protection.
Legally Secure Your Intellectual Property
Many businesses overlook the importance of intellectual property (IP) protection when securing their personal assets from business risks.
When you protect your IP — for instance, by registering a trade mark — you secure legal ownership of it. This means no one else can use that trade mark without your permission. If they do, you can pursue legal action against them. This is essential for protecting your brand and preventing others from capitalising on your hard work.
However, if someone infringes on your IP and you haven’t secured legal ownership, you could face serious challenges. Businesses can lose hundreds of thousands of dollars simply because they failed to protect their IP. Often, personal finances are invested in lengthy legal battles, and there isn’t always a positive outcome.
Protecting your personal assets isn’t just about contracts and legal structures — it also involves proactively securing your business assets to avoid having to use your personal finances towards putting out fires.
Ensure Your Business Is Legally Compliant
No matter how much you invest in legal protection, it’s difficult to safeguard your business (and even your personal assets) if you’re engaging in illegal business practices. It’s important to ensure your business is legally compliant with all relevant regulations, including:
- Australian Consumer Law (ACL)
- Data and Privacy Law
- Employment Law
- Industry-Specific Laws
- Tax Obligations
In serious cases, failure to comply with these regulations can lead not only to business-related issues but also to personal liability. Consulting with a legal expert to understand your obligations and refining your business practices to ensure they are always compliant is essential to avoid the worst-case scenario.
Develop An Exit Strategy And Plan For Growth
Finally, it’s important to have a plan for both when your business experiences growth and when you’re ready to gracefully exit the business world.
When your business grows, it’s essential to review your contracts, revisit your business practices, and reassess the business as a whole to ensure your asset protection remains intact. Remember, there is a significant difference in liabilities, risks, and legal obligations between a small business and a larger one. If your business makes this leap, it’s crucial to review all internal documents, policies, and operations to ensure they continue to serve your needs.
The same principle applies when exiting your business. As you untangle yourself from the company, it’s important to have an exit strategy that clearly defines your legal standing, ensuring that neither you nor your personal assets can be impacted by future events. Consulting with a legal expert is vital when making these plans — they can provide the guidance needed to ensure everything is properly aligned.
Key Takeaways
To protect your personal assets when starting a business in Australia, it’s essential to utilise the right legal mechanisms. To summarise what we’ve discussed:
- Choose the right business structure, such as a company or trust, to provide limited liability and protect personal assets
- Avoid personal guarantees whenever possible, as they can expose personal assets to business liabilities
- Expertly drafted contracts are critical to limiting liability and ensuring legal protection for your personal assets
- Protect your intellectual property (IP) by securing legal ownership through trade marks to prevent others from exploiting your brand
- Ensure your business is compliant with relevant regulations (e.g., Australian Consumer Law, employment law, tax obligations) to avoid personal liability
- Plan for growth and exit strategies by reviewing contracts and business practices to maintain asset protection as your business evolves
- Consulting with legal experts at every stage is essential to ensuring compliance and safeguarding personal assets
If you would like a consultation protecting your personal assets when starting a business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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