Limited Liability Companies: Do they REALLY protect you?

Limited Liability Companies: Do they REALLY protect you?


Author: Michael Levertoff
 
 NZ Accounting is about to suggest something radical to you: Believe it or not, we usually recommend that clients don't trade through a limited liability company (there are some exceptions to this rule - which is why we're here to advise you).
 
 But hang on, what about limited liability, I hear you say? What happens if I get sued by an employee? What about income splitting - won't I pay more tax? Well, I have some bad news for you.
 
 These days, limited liability companies don’t really protect you from anything – other than 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”).
 
 Suprised? 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 be held 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 compliance costs related to companies (which are excessive for any business turning over less than $500,000 per annum), and that income splitting between you and your partner can be done in other 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 $210+GST 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), it is clear that we have an addiction to companies. Given the proliferation of companies formed in New Zealand, it's no suprise that their value and status has been attacked.
 
 But here's the good news: we inform our clients that companies don’t protect you - public indemnity insurance does.
 
 That's why we recommend you invest in a good public indemnity insurance policy – for real protection of your business and family assets.
 
 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 personal assets, we advise our clients to ensure they have a family trust. It makes sense to use a trust because trusts protect assets from business failure almost all the time (there are exceptions to that rule - we're here to advise you when it is not appropriate to form a trust.
 
 Where a limited liability company is required we recommend that a trading trust owns the shares - because in this case, a director of a company owned by the trust is acting as trustee for the trust. 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.
 
 If you need further assistance please Ask a question.