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.
If one member is declared bankrupt, it usually spells the end of the partnership.
A way of further mitigating the risk of losing personal assets in partnership is by becoming a limited partnership.
Limited liability partnership (LLP)
An LLP, like a limited company, is a separate legal entity from the owners, and therefore financial liability is detached.
A US creation, the LLP came to the UK in 2000 after campaigning from the large accountancy firms, and is commonly used by accountants.
Limited liability company (LLC)
This type of company structure also creates a legal separation between your business and your personal finances.
Liability is limited to the nominal value of shares in issue. If you have 1000 shares in your company, each valued at £1, then your personal liability is for £1000.
Public limited company (PLC)
A PLC offers shares to public investors. Adopting this company structure is primarily done to raise funds through the share offer.
But adopting this structure offers further advantages, in that any risk is shared by all the shareholders – no director, major shareholder, or family member need worry about personal assets being seized in the event of bankruptcy.
A word on insurance
Every business should take out insurance. At the basic level there will be ‘combined’ package designed to suit most businesses like yours.
This will at least offer basic theft, fire, water damage cover for your assets and protect you from liabilities (public liability and employer’s liability insurance).
If you are a professional service provider then you probably need professional indemnity insurance too, tailored for your profession. Certain jobs also demand specialist policies, such as medical negligence cover.
Company bosses can also ensure their firm has taken out directors’ and officers’ insurance in case the management of the business is deemed negligent.
Many standard policies exclude business interruption, for example – make sure that is included so if you are prevented from working for a protracted period your profits are covered.
You might also be a heavy computer user, perhaps with data protection concerns and public-facing websites or apps. In that case you might need a specialist cyber risks policy.
And always consider your key staff, including you. Accident and sickness or keyman policies can help.
And if you say anything defamatory about a rival, an ex-employee or anyone else, remember libel cases can be taken against individuals, so you would not be protected by a company structure. That means any libel insurance would need to be for you personally.
In short, get advice from an insurance broker.