Bulletproof your Business: Tips for Protecting Growth and Success

As you develop your business, it's important to protect yourself and your business for successful growth. Tips we discuss in this article include choosing the right business structure, safeguarding business and personal assets, and documenting business plans early. These steps will help lay the right business foundation, safeguard your interests and prepare you for the unexpected.

 

Business structure

 

In New Zealand, there are three common business structures: sole trader, partnership, and company. Choosing the appropriate business structure will mitigate the risk that business liabilities and legal disputes pose to your personal assets.

 

• Sole trader: The simplest and least expensive business structure. An individual runs a business under their own name or a trading name, and is personally responsible for all aspects of the business. However, there is no legal separation between the individual and the business, so personal assets can be at risk for business debts or liabilities.

 

• Partnership: Where two or more people join together as a “firm” to run a business with a view to profit. Partners share responsibilities, decisions, profits, and debts and liabilities of the business. One risk of partnership is that partners can be jointly and severally liable for debts incurred by other partners, even without their knowledge or agreement. Partners’ obligations to each other and the partnership can be set out in a Partnership Agreement.

 

• Company: A separate legal entity that exists on its own. It is made up of shares held by shareholders (the owners), and the day-to-day management is the responsibility of directors (who may also be shareholders). A company can enter into contracts, buy/sell property, and take legal action in its own name. The key benefit of a company structure is limited liability, as the company is responsible for its own affairs and, generally, its directors and shareholders are not personally at risk of liability. However, banks and suppliers will likely still require personal guarantees from directors and shareholders, which can expose them to personal liability.

 

Protecting assets

 

Building a business goes hand in hand with accumulating assets, both within the business and by owners personally. Protecting assets is crucial to successful business growth while safeguarding owners’ financial security.

 

•  Business assets are not only physical property; the intangibles of a business, including intellectual property, can be equally important. New intellectual property rights may be registered – such as a unique business name, logo, product or invention. A registered New Zealand trade mark, for example, is easily enforced and helps to protect business reputation and goodwill, while building brand recognition.

 

• ·Protecting personal assets is also important for business owners to safeguard their financial security. This can be achieved by choosing the right business structure (discussed above), obtaining adequate insurance coverage for yourself and your business, keeping personal and business finances separate, properly structuring and documenting business ownership and contracts, and seeking professional advice.

 

•  A business owner may also consider establishing a Trust, which can be an excellent way to protect and preserve personal assets for future generations. Transferring a family home or company shares to a Trust, for example, adds protection due to the legal and practical separation between personal assets and assets owned by trustees of a Trust. We discuss Trusts further here.

Business plan

 

Discussing and writing down a business plan as early as possible is a great step to protect owners’ interest and prepare for the unexpected. Formalising that plan and the rights and obligations of the parties in a binding Partnership Agreement or Shareholders’ Agreement will ensure that owners’ interests are aligned at the outset and they are prepared if the worst scenario occurs.

 

For a company, a good Shareholders’ Agreement may cover:

 

•  Key decision-making processes, including which decisions require shareholder approval and the threshold for approval;

 

• Procedures for selling shares, including pre-emptive rights, drag-along rights, and tag-along rights;

 

• Funding options and shareholder guarantees, as well as restraints on shareholders' ability to work or invest in similar businesses; and

 

• Dispute resolution procedures, as well as consequences if parties fail to meet their obligations, such as selling shares at fair value or a discounted price.

 

Every business will have a unique plan, with owners having varying levels of experience and control. A tailored approach is required for a good Shareholders’ Agreement to ensure owners’ interests are protected and you can focus on growth.

 

If you would like to discuss how best to protect you and your business, with a team that shares your enthusiasm for business growth while understanding the challenges it brings, contact Sarah (sarah@fsl.nz) or Jordan (jordan@fsl.nz).

 

Disclaimer

The information on this webpage provides you with general information that is true and accurate to the best of Ford Sumner’s knowledge.  Ford Sumner may change, delete, add to, or otherwise amend the information contained on this webpage without notice.  Information on this webpage is not business, tax, or legal advice. You should take specific, professional advice before taking any action based on this information.  While Ford Sumner has taken all reasonable care in placing the correct information on this webpage, it cannot be liable for any inaccuracy, error, omission, or any other kind of inadequacy, deficiency, or flaw in, or in relation to the information contained on this webpage. Ford Sumner fully excludes any and all liability of any kind to any person or entity that chooses to rely upon the information.