Some friends started a business together and decided not to document any arrangements between each other as they had agreed on the way they wanted to operate the business based on a handshake. 

Unfortunately, years later they had a falling out and the company started to become unable to pay its debts.  This was mainly because one of the directors was contacting customers and enticing them to a new company he was creating.  Creditors of the initial company started to bring Court proceedings against the company and the directors personally for outstanding debts and guarantees.

When you are a business owner, no matter whether you are a start up or a longstanding business, it is vital to protect your assets and have your affairs in order in case things go wrong.

Some key aspects to consider are:

Trusts

Trusts keep assets separate from your own personal assets.  If you are in a business where there is a risk you could be sued for your work, a trust is a good option for ring-fencing your assets out of your personal ownership.

Trusts need to be maintained to be watertight.  They are not something you set and forget.  You need to ensure you have annual meetings, make all decisions through the trustees and not treat the assets like they are your own.

It is best to set trusts up prior to going into business otherwise it can easily be argued that they are set up with the intention of defeating creditors/people you owe money to and can be unwound by the Courts.

You should consider putting your family home in a trust, or shares in your company, or both.

Note that trusts are not on their own enough for relationship property protection; generally, you will need a contracting out agreement if you are trying to keep your business or other assets separate from your spouse or partner.

Document your business arrangements in writing

Handshakes are not a good way to document business arrangements and do not help to resolve disputes down the track!

Make sure you have a signed lease for your premises, you have robust employment agreements and clear contracts with your suppliers. 

If you have a company with more than one shareholder, make sure you have a signed shareholders agreement.  Shareholders agreements are a great way to ensure you record at the outset what happens if one of you wants to sell your shares, one of you dies or is incapacitated.  Often the husband or wife of a shareholder would end up with their shares via their spouse’s Will if no other arrangements are made in relation to the shares, which is not always very practical for a business.

Recording all key arrangements between the shareholders at the outset helps avoid disputes down the track about what was agreed and puts in place a mechanism to deal with them if they do arise.

Wills

Your shares in a company are part of your personal assets dealt with in your Will.  You can gift them in your Will separately to the rest of your assets, depending on what your company constitution or shareholders agreement provides. 

Enduring Powers of Attorney

If you are a company director or shareholder of a company, you should think about what would happen with the business if you were to lose capacity.

Your partner won’t be able to automatically deal with your shares in the company or make decisions for the company if you lose capacity.

Enduring Powers of Attorney will cover your personal assets including your shares and will therefore allow your chosen attorney to make decisions on your behalf if you are mentally incapable of doing so.

To cover your role as director you can put in place either an alternate director or a company power of attorney.

Act while things are good!

It is best to sort these things out while you have capacity and as early as possible in the company’s journey.  The processes for dealing with any of the above are much harder if you have lost capacity or have not put things in writing at the outset.  In many cases that ends up involving the Courts, which is expensive and time-consuming.

Your legal advisor can ensure documents are tailored to your particular business and situation.