Are you a business owner (or the significant other of a business owner)?
Most business owners are optimistic folks who look forward to a bright future, even under adversity. I suppose they need to have this remarkable ability given the risks they take and the challenges they face.
That said, we have found there are 5 Key risks that all business owners need to be aware of and take action on to protect themselves and their families, from their business.
This simple concept, is often quickly dismissed with the question, 'Why would I ever need to protect myself from my business?"
If you don't know the answer to this question, you definitely need to read this article.
Read in this article
- The Sapience Rules for Small Business Owners on how to protect yourself and your family, from your business.
- Rule #1 Always Protect Your Family, from your business
- Rule #2 Understand different levels of personal liability come with different business structures.
- Rule #3 Protect your Assets, from your business (including jointly-owned assets).
- Rule #4: Understand why it’s important to have some savings/investments outside your business and liability reach.
- Rule #5 Understand which mixed assets are in use and the effect upon your business and family of losing them.
- Where to Now?
- FAQ's
- What's the biggest financial risk my business poses to my family?
- My business is a company. Isn't that enough to protect my personal assets?
- How does life insurance help protect my family from business debts?
- What is a 'contingent liability' and why should I be worried about it?
- My business is successful. Do I still need this level of protection?
The Sapience Rules for Small Business Owners on how to protect yourself and your family, from your business.
As a business owner, there are plenty of things you need to manage and two of the most important of these are;
- liabilities,and
- the risk to your assets.
Rule #1 Always Protect Your Family, from your business
Business owners are liable for the actions of the business – how far that liability extends is different for each business structure.
This is important to understand because your level of personal liability determines the potential risk to your family's assets.
Rule #2 Understand different levels of personal liability come with different business structures.
As a business owner, there are plenty of things you need to manage, and two of the most important of these are liabilities and the risk to your assets, individual and jointly owned. Different business structures all have different levels of owner risk, so understanding your liability and how that affects your family is key to knowing what you are protecting and why.
Sole Traders and their businesses are seen as the one entity with no separation between business and personal responsibility.
- As a result, Sole Traders carry unlimited personal liability.
- This means if you are sued, your personal liability is unlimited and this puts at risk all your personal assets, including any assets jointly owned with another person, such as a family home.
Partnerships usually have unlimited personal liability, and joint and several unlimited liability for all the actions (and inactions) of their Business Partner too.
- As a result, Partnerships that do not have a documented Partnership Agreement in place, are seen as doubled-high-risk ventures with all business and personal\assets of every partner at risk and joint liability for all criminal, fraudulent and negligent actions too.
- Without a Partnership Agreement in place, all an individual Partner's assets are at risk from the business.
Company structures are separate legal entities, where directors and shareholders are generally protected from being personally liable for the company's debts. As a result, there is often said to be a ‘firewall’ between the personal assets and liability of the directors and the company’s actions.
- This protection lifts as soon as Directors give a personal guarantee in favour of a company creditor and becomes personally liable.
- Additionally, insolvent trading, Director's Penalty Notices (DPN) and outstanding tax obligations are considered personal liabilities regardless.
Rule #3 Protect your Assets, from your business (including jointly-owned assets).
A family business has unique risks which are dangerous when the majority of a family’s wealth and assets are tied up in that business. Knowing your own level of risk exposure is key to better managing them.
Pro Tip: This video will help explain how to best categorise the risks you face.
Rule #4: Understand why it’s important to have some savings/investments outside your business and liability reach.
Have some savings outside your business structure
- superannuation is an investment usually bankruptcy-shielded
- insurance saving and investment bonds are non-estate assets and equally shielded from the reach of bankruptcy trustees.
You can learn more about non-estate assets here.
Rule #5 Understand which mixed assets are in use and the effect upon your business and family of losing them.
Many families rely on a family business as their main source of income. When this is the case, and the family business endures a difficult month, family income decreases. Many may also share business assets as mixed-use assets (a car to pick the kids up from school, mobile phone plans and related shared-use items.) It’s fair to say family life and business life are more and more intertwined and core risks to a business can be significant risks to the family of the business owner too.
Where to Now?
It's time to develop a way of Family First Business Thinking and protect your family from the structural risks of your particular business.
FAQ's
Your Famiy Protection Questions, Answered. Here’s a quick summary of what you need to know about beuing a small busienss onwers and havimng a family.
What's the biggest financial risk my business poses to my family?
The biggest risk is that your family's personal assets—especially the family home—are directly tied to the financial health of your business. Many business owners use their home as security for business loans. If the business fails, the bank can seize your home to repay the debt, leaving your family with nowhere to live. It's a devastating scenario that we see all too often when there's no separation between business and personal finances.
My business is a company. Isn't that enough to protect my personal assets?
Operating as a company provides a level of protection, but it's not a silver bullet. If you've signed a personal guarantee for a business loan, a commercial lease, or a supplier credit account, you have created a direct link between the business's debts and your personal wealth. In that situation, the "corporate veil" won't protect you; creditors can and will come after your personal assets, including your home, if the business can't pay.
How does life insurance help protect my family from business debts?
Life insurance, along with disability and trauma insurance, creates a separate pool of money that is independent of your business. If you were to pass away or become seriously ill and unable to work, the insurance payout provides immediate cash. This money can be used by your family to pay out any business debts you have personally guaranteed, freeing up the family home and other personal assets. It effectively builds a financial firewall between your business and your family.
What is a 'contingent liability' and why should I be worried about it?
A contingent liability is a potential debt that only becomes real if a specific event occurs. The personal guarantees you sign for your business are perfect examples. While the business is running smoothly, that guarantee is just a piece of paper in a file. But if the business defaults, the liability becomes very real, and you (or your estate) are suddenly responsible for the full amount. Many business owners forget about these guarantees over time, leaving a hidden financial time bomb for their families.
My business is successful. Do I still need this level of protection?
Absolutely. In fact, success can often increase the risk. As a business grows, it usually takes on bigger loans, larger premises, and more significant supplier contracts—all of which typically require larger personal guarantees. The more successful you become, the bigger the contingent liabilities can grow. Planning for these risks when times are good is the hallmark of a smart business owner. It's about ensuring that a future downturn in the business doesn't wipe out a lifetime of hard work and put your family's security at risk.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
