Protecting a Family from the Business Structure

Protecting a Family from the Structure Liability Risks of a 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 personal assets.


Protect your Family from your business

Business owners are liable for the actions of their 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 personal assets.


Understand different levels of personal liability come with different business structures

Different business structures all have different levels of owners risk, so understanding your particular liability and how that affects your family, is the first rule of a family first small business.

Sole Traders are seen as the-one-and-the-same 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. This puts at risk all your personal assets, including assets jointly owned with another person, such as a house.

Partnerships usually have unlimited personal liability, and joint and several unlimited liability for all actions (and inactions) of all the business Partners too.

» As a result Partnerships that do not have a documented partnership agreement in place are doubly high risk with all business and personal assets of every Partner at risk – along with joint liability for all criminal, fraudulent and negligent actions too.

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 become personally liable.

» Additionally, insolvent trading, Directors Penalty Notices (DPN's) and outstanding tax obligations are considered personal liabilities regardless.


Protect your Assets from your business (including jointly owned assets)

A family-run business has unique risks which is 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.

Watch a quick video here about how to categorise the risks you face.


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 cash-flow month, family income decreases. Many may also share business assets as mixed-use assets (like a car to pick the kids up from school, mobile phones, and related shared-use items.) It’s fair to say family and business life are now more intertwined than ever and any core risks to a business can be significant risks to the family of the business owner too.

Develop a way of Family First Business Thinking, to protect your family from the structural risks of your particular type of business.

Ongoing fixed Business Expenses Insurance OR Key Person Replacement

Business Debt and Ownership Insurance

Chat with a
Specialist Business Risk Advisor

If you'd like to talk through your Small Business Protection options, we'd love to help you out with that.

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Company & Multi Owner Businesses

While an increasing number of professionals choose to start a business with another person in a Partnership, a Company structure suits the needs of many modern small businesses that want the legal protection of a separate legal business entity, owned by the Shareholders and run by the Directors. Not all registered Companies have multiple owners. Some are run by shareholders and a solo director who often do the work of two people and acts as the secretary and shareholder.

Different views of the same structure

  • Accountants love to talk about how company structures are useful for those who want to scale, and how a company business structure enables easy additions of new shareholders, investors, and co-owners.
  • Financial Advisors focusing on protecting people from risks and personal liabilities, will point to the independent entity as a useful protected liability structure.

Regardless of what you focus on and why, because company structures run on people and capital, they have their own unique risks so directors and owners, along with their families, need to be protected from the business.

The company structure brings different risks that still need to be managed

A company is considered an independent legal entity owned by shareholders and run by company directors, and therefore, individual shareholders are only liable for debts or liabilities that the company incurs up to the amount unpaid on their shares (which is commonly zero). 

A note about alternative business trust structures

A Discretionary Trust structure with a trustee company is a very popular business structure because it offers asset protection, flexibility in income splitting, and access to a 50% general Capital Gains Discount.

A Unit Trust is similar to a discretionary trust however the beneficiaries have fixed entitlement to capital and incomes. A Unit Trust has less regulation than a company and is easier to wind up. It also has access to the 50% general Capital Gains Discount. Its ownership portions are specified in numbers of Units, which can be easily transferred. This is often a suitable structure for unrelated parties to go into business together. The downside is stamp duty is payable on the sale/transfer of units in many states. Unit trusts also offer less flexibility in income splitting and asset protection compared to discretionary trusts.

Regardless of the business structure that you are using, you are still exposed to the statistical people-based risks of Life and Business.

Capital and People-based risks overlap

As a business runs on people and capital, whatever affects people and capital becomes a risk for a business.

As business and family life are progressively more intertwined today – from cross-securing business debts with personal assets and guarantees through to mixed usage assets and fixed overhead costs (those keep-the-doors-open-for-business-costs) usually longer term and contractual in nature – people and business risks overlap.

The foundation of running a company is we all face the statistical reality of people-based risks.

  • the more business Partners we work with, and Key People we rely upon, the greater the people-based-risks we face.
  • the more we use personal assets to cross-secure company debts and Directors' Guarantees, the more intertwined our businesses and families become, and if uninsured, more liable for a domino effect event.

The statistical risks are unavoidable - we all face them equally - we can only better manage them.

Chances of you needing to claim on your life insurances policy

How we can help

Don't leave the future and stability of what you have worked so hard for, to chance.  Hope for 'only a bright future' is not a business strategy. Company Directors have specific risks to address so they can protect themselves and their families from the business.

Contact us for a confidential chat about your needs.

Related: Business types we work with

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