What keeps you awake at night? (Protect Your Business)
Many people think accountants are there just to give good tax advice. We can of course do that, but our advice is so much more than that! One thing I am keen to talk to people about is the doomsday scenario – have you thought about what would happen to your business if something went drastically wrong? Perhaps an unfortunate accident involving an employee or customer, a major error leading to a loss of customer confidence, or a serious data breach? Unfortunately, despite all of the best planning in the world, serious issues do occur. What can businesses do to protect their assets in a doomsday scenario?
- Insurance – this is of course the most obvious form of protection. However, there are a myriad of policies out there, with varying excess, maximum amounts insured, and exclusions. Insurance policies should be thoroughly investigated and reviewed, rather than just judged by price. There are also many common mistakes businesses make when applying for insurance, for example not understanding that gross profit insured has a specific definition and is not simply the gross profit from the accounts – this can and has lead to businesses finding they are significantly underinsured in the event of a claim.
- Incorporation – being a sole trader or partnership offers many potential advantages, such as being cheaper and simpler to administer, and being tax efficient at low profit levels or in loss making situations. However, legally a sole trade or partnership are not separate legal individuals, and in reality the business is just you and your partners. In the event of a doomsday scenario, your personal name is liable for the business debts, and hence your entire personal wealth is at risk. Sole traders and partners should think very carefully about the risk profile of their business, and consider if limited liability in the form of a company is worthwhile.
- Holding companies, group structures, and pension schemes – once you are already trading as a company, wealth can begin to accumulate in the company, perhaps in the form of properties, cash, or investments. A company’s liability is only limited to it’s total value, so once that value rises there is still a significant amount at stake in a doomsday scenario. This risk can be reduced further by compartmentalising assets into different entities, such as via setting up a holding company, other group companies, or even using pension schemes to hold property and other assets. Often, group re-organisations or holding company insertions can be undertaken with no tax consequences provided advice is sought and a process is followed. We would strongly recommend any companies with significant value or properties within the trading company should consider the possibility of a holding company.
- Advice, minutes, and documentation – generally speaking, companies have limited liability. However, where directors have failed their legal duties in the event of a doomsday scenario, then liabilities can revert back to personal liabilities of directors. This is known as lifting the corporate veil. To avoid this, we would strongly recommend standard good practice for directors – hold regular meetings, document these meetings and the thought process behind decisions, and take advice from professionals where anything seems contentious. Often, provided directors can show they acted with the interest of the company’s success at the forefront of their mind, and decisions were well thought through, then even if those decisions ultimately prove to be the wrong ones, personal liability can be defended.
If the doomsday scenario in your business keeps you awake at night, and any of the above seem relevant to you, please do feel free to get in touch.