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When you are starting a new business in New Zealand, there are various situations where your personal assets (your house, your car, and so forth) might be at risk if things do not go to plan with your new venture. For instance, because you are starting a new business, suppliers and landlords may well ask you for a personal guarantee instead of a track record and strong reputation. However, there are a few ways you can protect your personal items.

This article sets out three pieces of advice, including to:

  • be careful with personal guarantees even though they may be necessary;
  • utilise limited liability business structures; and
  • consider a trust structure to protect your assets.

Be Careful With Personal Guarantees

It is common for a supplier or landlord to ask a new business for a personal guarantee to protect their interests. A personal guarantee means you personally guarantee the debt that you are going into with the other party. Therefore, if something goes wrong and the business is unable to meet the debt, you will repay whatever is outstanding. This can put your personal assets like your house or savings at stake if your business cannot meet its debts. It can be tough to get around this as a new business founder when you are still building credibility and your reputation.

However, there are things you can do to help protect your assets. For instance, you can ask for specific limits to be put on the personal guarantee. For example, when negotiating with a landlord, you could ask that the personal guarantee be terminated when the current lease expires. In addition, with either a landlord or a supplier, you can ask that the personal guarantee be time-limited. In other words, after a year or two years, once your business displays trustworthiness, the personal guarantee ends.

Be careful with the fine print of a personal guarantee and get legal advice if there are any issues or questions. You want to limit the exposure of your personal assets to the greatest extent possible while still providing your business with the credit it needs.

Limited Liability Business Structures Can Protect Your Personal Assets

Different business structures expose your assets to different levels of risk. For example, an average sole trader or partnership structure will mean you are personally liable for whatever debts your business incurs and cannot pay. This can mean your personal assets are at risk. However, other business structures have “limited liability”. This means the structure itself has full responsibility for its legal and financial obligations. Therefore, this structure limits your personal liability.

The most common example of this is a limited liability company. The company can incur debts and has obligations to meet those, but the personal assets of those involved in the company are separate from the assets and liabilities of the company itself. This can help protect you as the founder. However, suppliers or landlords may still ask for a personal guarantee if your venture is very new, and you will still be liable for this. Generally speaking, you will not be liable for the company’s debts in a company. Therefore, you have greater protection in this structure. 

Using Family Trusts

Another option to consider to protect your personal assets is to use a trust, such as a family or discretionary trust. Trusts are separate entities. Once you place assets in a trust, you no longer own them in your personal capacity. This means that in most cases, when you incur debt, creditors cannot claim trust assets to repay that debt as you do not own them. This is a common strategy to protect key assets like the family home, commercial property or valuable possessions like artwork. 

However, it can be tricky to set a trust up correctly. Trusts are complicated entities and you need to set them up correctly to protect your personal assets in the way you intend. You should seek legal advice if you are interested in opening up a trust for this purpose. There will also be additional costs associated with keeping a trust active.

Key Takeaways

Protecting your personal assets is a key consideration for many business owners in New Zealand. There are a variety of strategies that can help achieve this. Being careful with personal guarantees, and limiting them where possible, is a helpful first step. You can also consider a different business structure that limits your personal liability or using a trust to safeguard your personal and family assets.  

If you would like more information about protecting your personal assets, contact LegalVision’s commercial lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is a personal guarantee?

A personal guarantee is where you personally guarantee debt your business is incurring. Therefore, if something goes wrong and the business cannot meet the debt, you will repay whatever is outstanding.

How can a family trust help protect my assets?

A family trust is its own legal entity. Placing assets in a trust means you no longer own them in your personal capacity. This means when you incur debt, creditors cannot generally claim trust assets to repay that debt.

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