In a marriage or a de facto relationship, particularly where a business is involved, there is generally a higher chance of something going wrong with a business and higher risk of losing your assets as well as your shirt. In some circumstances, a not altogether undesirable result. That is, losing the shirt depending of course, on its former occupant …but preferably by choice, not by the actions of creditors.
It is sobering to think that something like 75% of all small businesses fail within three years from start up. Even beats the current divorce rate which appears to be hovering just under 50%. From this point, it does not take much of a quantum leap to accept that the failure of a business, which often results in a complete loss of assets including the family home, often puts a relationship under so much pressure, it is unable to recover.
If that was the goal of one or both parties, then you will probably both enjoy your diminished wealth status. However, assuming that most people subscribe to the view that it is much easier to suffer pain with a large bank account, or a few assets than a small one, then here are a few handy hints.
It is a sensible precaution to separate or quarantine the family home and other family or personal assets from the risks associated with most businesses. For example, in most states of Australia there is a stamp duty exemption which allows the transfer of non-investment property which is jointly owned by spouses including de facto spouses. If your spouse is about to embark on a new business venture with stars in his or her eyes, beware! More importantly, quarantine or put the family home out of harm’s way by transferring into your name alone.
Ah! I hear you say. Now I have my very own running away nest egg. I am afraid that is not necessarily so. In the event that your relationship becomes another casualty, the family law court will soon sort out an equitable division based on the particular circumstances regardless of in whose name the house is registered. So, there is no need to fear on that account. You also have the opportunity to re-transfer it when the risk passes, that is your partner is no longer in business.
Provided you do not sign any personal guarantees or any documents which allows a third party to sue you, or gain a charge or some form of security over the house, the asset is protected. In the event that the business fails, and in a worst case scenario, your partner is bankrupted you will still have the roof over your head. Very important, particularly, where there are children involved.
The situation is often a little more complicated because of the need to borrow for the business, and the only asset the friendly bank manager will accept as security, is the house. Now be very careful! For friendly bank manager read…when the business has gone pear shaped…wolf in sheep’s clothing! If you must put the house up as security, ensure it is for a fixed amount and limited to that. At least it will limit your potential loss. If you simply provide it as security for the bank, the fine print will allow the bank to charge all sorts of fees, costs, expenses, etc., and make all sorts of unreasonable demands, just at the time you can least meet them.
You may even consider borrowing a fixed amount from one source and running the business in credit with no borrowings attached to it. You will soon see how it performs and whether it is generating enough cash flow to prosper or survive.
I strongly recommend that you consult both your accountant because there are tax deductible possibilities and your lawyer, before putting any of these ideas in to place. If the proper steps are not taken, then you may be seriously putting yourself at risk, without being aware of it.