Business Structuring and Asset Protection

What is proper Asset Structuring for a Company’s business?

In Australia it seems that legal claims are on the rise. Even though Google is a great tool to give a business visibility both on the internet and in the local community, anyone is able to leave an adverse review of your business even though you may have done everything in your power to make that particular customer happy. Have you properly protected your Company’s assets to ensure that they are protected if an unexpected event occurs to your Company? Do you even know what a proper business structure may look like for your particular business type?

 If something adverse happens to your Company’s business, even if it is not your fault, you need to be able to make sure that the assets of the Company that are used on a daily basis are properly protected without the need to repurchase them ever again. This is where proper business structuring is worth its extra money, think of it like an insurance policy.

Many people believe that it is the legal entity that will save their assets i.e. Trust vs Company. That discussion is reserved for another day. It is not the legal entity that will save the assets. What will save assets is how the ownership of the Company’s assets are structured and if those assets are leased to a trading entity with a registration on the Personal Property Security Register (“PPSR”) and proper agreements between the two entities. The last part to ensure proper security of the assets is to ensure that there are payments of REAL money between the two entities.

 Currently many Company’s own significant assets needed to conduct the business in the same Company that trades the Company’s business. Many accountants will say that our asset structuring model is not cost effective and they are correct. But if you are faced with losing all the Company assets because the business has not worked out OR paying a little extra and being able to keep all assets used by a business to trade it on a day to day basis, which one would you choose? This is where the structure of Companies comes in to its own. Especially with less than 6% of Australian businesses sold at the end of their business lifecycle, it means that the remaining businesses either end up in some sort of insolvency or deregistered with the Australian Securities and Investments Commission. If you focus on the end of the business lifecycle and have a little planning for the future, you could ensure that if you are part of the 94%, you have protected the assets of the Company properly.

I know what you are going to say, “I’ll be one of the 6% that the business is sold.” However, the fact remains that everyone thinks they are going to be in the 6%, but when the end comes, they either are unable to sell the Company or have to too many debts to be able to sell. If you one of the 6%, congratulations as you have completed a feat that not many Australian are able to achieve. But what happens if you are not one of the 6%, would proper asset protection strategies for your company’s asset be crucial?

How does Corporate Asset Structuring Work?

Two Pty Ltd companies are set up in which one will be the trading entity and the other will be an asset holding entity. The asset holding entity does not trade directly with the public on a daily basis, not ever! The asset holding entity does not provide anyone with a guarantee for debts of the trading entity. It is solely there to purchase the assets that are needed for the trading entity to conduct its business. Where do the funds come from to purchase the assets? The same place that the funds were always going to come from either yourself personally or from a finance company. Remember if you loan funds to the asset holding company from your personal assets, take a security interest over the asset holding entity and register it on the PPSR, we can refer you to someone that can help you do this.

The asset holding entity enters into a commercial lease agreement with the trading entity for the use of the plant and equipment / assets / fit out. The agreement is registered on the Personal Property Security Register in the form of a security interest. The trading entity is required to make payments to the asset holding entity in accordance with the agreement, each and every month. Do not treat the asset holding entity as a “friendly supplier”. Due to the security interest, the asset holding entity is to be paid first by the trading entity. If the trading entity does not pay on time, the asset holding entity should be issuing demands for payment. Even though the Director may be the same, each entity should be treated separate from the other and actions should be taken 

If things do not work out for the trading entity, it can physically return the assets to the asset holding entity, no do not keep the assets at the premises of the trading entity. Then the trading entity can be placed into Liquidation and the assets can either be sold by the asset holding entity or released to another entity.

There are many pitfalls in setting this transaction up which we would be able to assist directors or accountants with. Book an appointment to see how we can help you to protect your company’s assets.

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