Time to read : 4 Minutes
Running a business can be lucrative, but to protect your personal finances from the occasional tough times your business might face, keeping your personal and professional finances separate is a sensible way to help safeguard your financial future. Having the right insurance cover adds an extra level of protection.
Why separate your personal and business finances?
Accounting is easier
Tax time can be confusing enough, without the added worry of calculating your income and possible deductions, so keeping it separate can save you time – and that means money.
Although many sole traders and small business owners pay for business expenses from personal accounts, or cover personal expenses from the business account, it’s a bad habit that makes it harder to track expenses you can claim.
Personal asset protection
Without any legal separation between your business and personal finances, you run the risk of being held personally liable for debts your business may be tied to, and that puts your personal assets at real risk.
EA asked Queensland-based law firm McNamara Law to explain the legal steps you can take to protect your personal finances from your business.
Here’s what they said:
How to protect your personal assets as a business owner
If you’re a sole trader, or a partnership, your personal assets will, generally speaking, be exposed in the event of any liabilities. By setting up a company or a trust you can, generally, create ‘limited liability’.
Many business owners prefer a dual company structure. In this set-up, contracts with clients, suppliers and employees are conducted through the operating company while the company’s primary assets – such as intellectual property, cash and other assets – are owned by the holding company (and protected from liability).
Trusts
Discretionary trusts provide a vehicle for a business owner to own their shares in the business while putting personal assets in the trust and business assets in the company. This also allows an owner to protect beneficiaries of the trust (most likely your family) from creditors, if a beneficiary is sued or made bankrupt, as the assets of a discretionary trust are distinct from the assets of the beneficiaries of the trust.
Trusts offer tax benefits too.
Other types of trusts can be used to run a business, through either an individual or corporate trustee. The trustee controls the trust and distributes profits to the beneficiaries of the trust, in accordance with the trust deed. In the circumstance of a corporate trustee, the company’s shareholders receive protection through the company’s limited liability but it does require an owner to incorporate another company, adding to your overall costs. Expert legal advice on creating and maintaining a trust is highly advised.
Put personal assets in the names of your family
Making sure the mortgage and deeds on the family home are in the name of the business owner’s spouse is another way to minimise the risk to personal assets. The same applies to personal savings and investment accounts. It should be noted that there are likely tax and duty impositions when existing assets are transferred.
Concentrate on superannuation
Personal wealth held by a superannuation trustee is generally considered untouchable by creditors or litigants against a business owner.
Therefore it’s advisable to follow a pattern of contributions to a super fund. Why a pattern? Because an out-of-pattern transfer to the fund, in expectation of a claim against the business, may be accessible by a litigant in any action against the business. In addition, any concessional contributions to the super fund will not only minimise the exposure of business assets but maximise your tax benefits.
If you have a self-managed super fund (SMSF), reduce risk of exposure to any action against the company by ensuring it has a corporate trustee, not individual trustees (who can be held personally liable for debts, etc). An SMSF may even allow an owner to purchase business premises through the fund, thereby protecting it against claims made against the business.
Insurance protection matters
Taking out professional indemnity insurance while running a business can reduce your personal exposure to any action taken against the company. As a director of the company, also consider a directors’ and officers’ (D&O) insurance policy and an indemnity deed (also known as an officer protection deed) to further protect your personal assets.
The need for contracts
Many business owners expose their personal assets to risk by not ensuring they have detailed and enforceable contracts in place that properly outline the business relationship with clients and customers, limit liability and provide protection against adverse claims.
The bottom line:
Keeping your business and personal finances completely separate may seem time-consuming but it’s time well spent. With a few simple strategies to help you manage your finances, your personal finances will be better protected – and it will make tax time much easier.
Go deeper: Clear separation of business and private assets
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
