Sole Trader
- No asset protection – potentially liable to the full extent of the business and private assets owned by the individual
Partnership
- No asset protection – each partner is jointly and severally liable even if the partner had no knowledge or and was not responsible for the debt
Company
- High level of asset protection where the objective of the client is to quarantine risk to the company. Creditors can have access to the companies assets but not to the assets of the shareholders.
- Where the company has traded insolvent or where a Director Penalty Notice is enforced in respect of unpaid employee entitlements then the directors can be personally liable. Personal guarantees reduce the level of asset protection offered by the company.
- A company structure does not offer asset protection where the shareholder is exposed to risk outside the company. Eg where a shareholder is at risk of becoming bankrupt due to activities outside the company. The level of asset protection can be increased if the shares are held by a discretionary trust.
Discretionary trust
- A discretionary trust with a corporate trustee provides effective asset protection. It is important that the corporate trustee only acts in its capacity as trustee of the trust and does not carry on a business or own assets.
- Creditors generally have recourse against the corporate trustee in the first instance and then against the assets of the trust. Creditors generally have no claim against trust beneficiaries.
- The effectiveness of a discretionary trust to protect trust assets from a third party attack has been diluted in recent times, particularly in the context of divorce.
Unit Trust
- A unit trust with a corporate trustee that does not carry on a business, nor hold assets, other than in capacity as trustee of the trust, provides a similar asset protection to a company.
SMSF
- An interest of a bankrupt in a super fund, is generally speaking, a protected asset under S.116(2)(d)(iii) of the Bankruptcy Act 1966.
- A super fund will not protect assets in the event the fund member divorces.