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Do Limited Liability Companies REALLY protect you?

Limited Liability Companies: Do they REALLY protect you?
Mon, 08/11/2010 - 11:31 —
I have some bad news for you. These days, limited liability companies don’t really protect you from anything – other than the debts that your company would owe if your business should fail, that you have not personally guaranteed. And even in this situation you can be held accountable if it is shown that your company incurred debt that it could not repay (this is called “trading while insolvent”).

Surprised? But wait, there's more bad news. These days, if your employee damages something, you can be held liable as a director. And if your employee takes you to court for unfair dismissal, you can also be held personally liable.

In fact just about every protection that a company offers has been eroded and stripped away over the last decade - with personal guarantees on the rise, and courts making decisions that make directors personally liable for company debts.

Add to that the extra compliance costs related to companies (compared to sole trading), and that income splitting can be done in more effective ways, and suddenly the idea of using a limited liability company as a vehicle for your business seems a bit of a waste of time.

How did this happen? Consider this: you can form a company online for $160 in about 20 minutes. In fact it is so quick and easy that NZ Accounting does it for free for our clients.

Because it is so easy, New Zealanders formed 47,897 companies in the 2008/2009 period and there are a staggering 519,835 companies as at 31/03/2009. Compared to Australia, where in the same period Australians formed 26,950 companies and there are 344,063 companies in total (population adjusted), perhaps New Zealanders have an addiction to forming companies.

Given the proliferation of companies formed in New Zealand, it's no surprise that their value and status has been attacked.

But here's the good news: even though companies don’t protect you, public indemnity insurance does. Public indemnity insurance covers:

- Accidental damage to anything anywhere
- Workplace accidents / ACC disputes
- Employer/employee disputes
- Legal fees

Are all covered under a Public Indemnity policy that most likely won’t cost you more than what you’re paying to an accountant for company compliance.

When it comes to protecting personal assets from business failure, consider using a family trust. It makes sense to use a trust because trusts protect assets from business failure almost all the time (there are some exceptions to that rule – speak to your advisor).

Where a limited liability company is required, consider using a trading trust that owns the shares – which reduces the risk to you as a director (who is acting as trustee for the trust). This is because although the usual provisions in respect of financial responsibility are upheld in all cases, in the case of a trustee, the liability stops with the trust.

So before you consider going online and forming a company, think again about what you are really trying to achieve – it might save you plenty.


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