A Guarantor is a fool with a pen

 

If you think you can afford to keep putting off making a Will, creating Enduring Powers of Attorney or even changing your current business structure, think again.

The end of a relationship can be unexpected and often life-changing. While you shouldn’t start planning for a breakup immediately after falling head over heels, be aware of the increasingly transitory nature of our lives – nobody thinks their marriage is going to end in divorce, but statistically… If it does occur, keep in mind, or better yet, keep a copy in your filing cabinet, some of the issues we are looking at month by month. If you’re one of the lucky few and have no need, then statistically you’ll have another couple of friends who do.

Sole Trader is operating a business in your own name. If you operate under any other name, you must register a business name. However, you remain personally responsible for all debts and obligations of the business, and all of your personal assets are available to potential creditors, including your house if it’s in your name. This is a very common way for small businesses and tradesmen to operate. If you are in a relationship with a person in this situation, and you have joint assets such as a house or joint bank account, I suggest you do something about it. Now! While there may or may not be valid insurance in place, it is not worth risking the joint or family assets. Mistakes happen.

Partnership is carrying on a business with others, with a view to making a profit. Whether or not you have a written agreement, which I would always recommend, you are governed in Victoria by the provisions of the Partnership Act. Many small businesses, including husband and wife and de facto relationship businesses, operate this way as a simple and effective way of splitting income. However, you should be aware of the dangers of partnerships.

Emotionally significant relationships and the consequences that can flow can be difficult enough. However, they pale in significance compared to your potential liability as a partner in business. You can be personally and completely liable for your partner’s debts. There are some legal niceties as to the respective liability and obligations between the partners and limitations on debts being incurred on the ordinary course of the partnership. However, the responsibility you can face on behalf of your partner can put all of your personal assets in jeopardy.

No point trying to quarantine assets in this situation. Effectively you are a guarantor of your partner. Remember the old saying “a guarantor is a fool with a pen” Banks love guarantors. That should give you a clue. You need to consider either changing your structure or at least holding your assets in another legal entity. A trust is an excellent option, but there are a number of others such as a company which may be appropriate, depending on your circumstances.

The take-away is to always separate, as far as possible, your assets from your potential risk. Anyone who guarantees they do not make mistakes or can predict the future will be far too much trouble as a partner in any event, and you are best rid of them. This is an area in which you should definitely seek advice from both your legal and tax advisers.

 

If you would like more information on minimizing your risk or asset protection, email us now at nevileco@nevile.com.au