There are always risks in business. Unless you take steps in the early days, you could put your company's assets, and in some cases even personal assets, in danger.
If your business is sued or you can no longer pay your debts, how can you be sure your assets are safe?
Here, we'll take a look at what protection some of the common business structures offer, and what steps their owners and managers can take to keep their assets safe.
A sole trader or self-employed person is in the most danger of creditors coming for their personal assets should the business fail.
Or, if your business is sued, it means you could lose your home and your savings.
Although set up costs are cheaper, being a sole trader means your business debts can become personal debts unless you take measures to avoid this.
As a sole trader, there is really only one course of action should the worst happen, and that is to apply to the court to declare bankruptcy and appoint a receiver who is then responsible for selling your non-essential assets and sharing the proceeds among your creditors.
A preferable alternative is to negotiate, or appoint a legal/business intermediary to negotiate on your behalf, a proposal for gradual repayments of your debt.
Only a court can declare you bankrupt, but you, or any of your creditors can ask the court to do so. Your creditors cannot pursue you for outstanding debt during the bankruptcy period, which is usually a year.
But remember, you have to live with the consequences of the damage to your reputation. For a start, you'll find it difficult to get credit in the future. Here are three more of your biggest problems:
1. You can't borrow above £500 without telling the lender you are bankrupt
2. You must obtain permission from the court to create a new company, or become a company director
3. If you begin to trade under a different name, you must tell suppliers and clients you are bankrupt
If your business has more than one owner, not only are the profits shared, the risk is spread. More people means more fundraising power and so you can now start to think about building a "war chest" to help protect against creditors or litigants.
Building a partnership with other professionals in your trade is one way of helping protect personal assets, and is common among law and medical practitioners.
In the UK a business partnership is defined as "the relation which subsists between persons carrying on business in common with a view of profit".
It must have at least two members, but can consist of many. A member can be an individual, a company, or even another partnership.
Much like sole traders, each member of the partnership is an individual entity as far as any litigation or claims from creditors are concerned, but the partnership shares the liability and financial risks.