My partner is currently in the process of opening a yoga studio and remedial massage clinic in Sydney. We have a total of 3 investment properties, one in joint names and 2 in my name only and have the intention to purchase more down the track. Is there anything we should do in regards to the business structure in order to seperate it from the investment properties? Being a hands on business and dealing with lots of injuries, there is the potential for a lawsuit. Thanks!
My wife is very well educated when it comes to the body and never pushes clients beyond their safe limits but there is still the potential for an injury while doing yoga or treatment of an existing injury in either yoga or massage. All necessary insurances are/will be in place, separation of the assets would just be for peace of mind / added security and I thought may be recommended for any business.
You should be concerned about (broadly) negligence and contract disputes. Using a company will limit the liability to the company in most cases, but not all. OHS issues the director can be personally liable - so having just one director can be added protection. Directors can be personally liable in many situations and the directors having little assets can help with even more protection. If there are existing assets in personal names then there are some strategies to protect these too. See my legal tips - look for the tag 'asset protection'.
@Terry_w doesnt public liability insurance protect you from all of this though? For example, if I sell a product that severely injures someone they would sue me but doesn't the public liability cover it all anyway providing I wasn't being purposely negligent which would make it a criminal matter?
I don't know much about insurance, but it may protect certain aspects but not all. For instance if you were selling flour and this was tainted with poison 'you' the seller may be covered for injury caused. But the bread company would lose a heap of customers and sales over this so they may sue for this loss. This may or may not be covered by the insurance. And then the insurance company finds out it was a deliberate act by a disgruntled staff member - would you be covered at all? It might be a criminal matter then, but that doesn't help if you the staff member gets charged with a crime - you could sue him, but he is 18 and lives with his parents and has no assets...
Thanks, I get all that but broadly speaking I think as a business if you have a public liability insurance and something happens you are fine. Having said that as your wealth grows it's not a bad idea to try and structure them to limit any liability if it occurs. I had two public liability claims against my business and both times I just sent the paperwork off to the insurance and they dealt with it all. Didn't cost me a dime.
Just to add....it is scary when you receive a letter of demand from a lawyer addressed to you but then you remember "oh yeah I am insured for all this stuff" One case was where an employee knocked over and broke another contractors expensive piece of equipment that cost 60k. Another was when someone else's worker tripped over some of our material and sprained their ankle.
When I was a director, I always ensured I had massive loans against the properties in my name. If I was ever sued (and I was never), they could have the 5% to 15% left over after the bank took their chomp. Work well with properties valued at $300K, not so well for properties valued at $1M, $2M, ...
Initially, I borrowed the money to buy the properties. Once the value went up (sometimes it took a while), I used the increased equity to borrow more funds to do major renovations. Later, we used trusts to buy investment properties. No longer a director of a company owing a business. No longer worried about business risk.
The trouble with borrowing money as an asset protection strategy is that the property you buy with it is an asset. Initially there is no equity because of transaction costs such as stamp duty. But the values generally increase.
It would have been better if I had gone into business first then bought IPs (put asset protection in place as I purchased) BUT I started buying IPs (with the thought that I would never go into business) and then I went into business. People tell you to start with the end in mind. That is great until you change the destination. If I was starting my investment journey today, I would put flexibility as my top priority. That is, leave as many doors open as possible, In highsight, I don't believe you can have too much flexibility. I see some people taking a rigid approach, just to save a few bucks. It will cost them big bucks to "get out of those chains" later if they change their minds.
This happens to many people. Some investors become so keen they end up becoming developers. I had one couple who acquired several properties all in joint names (before coming to me) who then wanted to get into the risky development game. Very hard to protect existing properties like this.
Protection of PPOR is something else one should consider. We changed our PPOR from joint tenants to tenants-in-common; 99% to the wife, 1% to me (the risk taker). From memory, there was no S/D as we utilised the "love and affection exemption". From memory, I don't think there were any costs. I think we might have updated our Wills
But did this provide any asset protection? Probably very little. In QLD this would attract stamp duty now.
Loads of cases where public liability wont pay. Insurance industry works this way : 1. Is it a insured event - No, decline cover. Yes - See Rule 2 2. Send claim to legal team to fight claim. Even if client loses out. Whats the difference between professional indemnity and public liability cover ? The answer relates to the difference between a general duty of care and a professional duty of care. Example: Yoga instructor leave mat outside offices and pedestrian trip and breaks hip. Thats general duty. Yoga instructor in class teaches an exercise which results in paralysis or limited lobility.. Thats professional indemnity. Sometimes its even harder. In a telecommunications business I was involved in we held materials provided by head contractor. On site. Secured. Some a'hole cut the 20km long single fibre optic cable rendering it useless requiring removal and resupply and reinstall.. Who was responsible for the $150K materials ?? The $250K to remove and install it ? Answer...PI didnt cover it as we didnt do anything wrong. Public Liability didnt either (didnt harm third party) so the project insurance did. Best $40K we spent that year. It covered project losses due to mishap.
