With the world economy teetering on the abyss of a double-dip recession, business owners can anticipate tough times ahead. Its going to be more and more difficult to keep the balance sheets healthy and, if there is only one certainty in life, the number of businesses in terminal trouble will increase by leaps and bounds.
This is when the chosen structure of your business can literally make or break you in your personal capacity. If youve structured your business incorrectly, and it is unable to settle outstanding debts, its very likely disgruntled creditors will go after your personal assets by raiding your private bank account or attaching your home, car and other personal belongings.
Get Legal Advice
To avoid personal liability and possible bankruptcy, it is essential to obtain the correct advice – upfront – from a law firm with a proven track record in corporate and commercial law. Cape Town attorneys, DSC Attorneys, for instance, have the capacity to advise and restructure your corporate debt, ensuring your private assets are not at risk.
Although the specialist Cape Town law firm is far more equipped to guide you through the process of structuring your business or, in the worse case scenario, negotiating a debt settlement or filing for personal bankruptcy on your behalf, we have itemised traditional business structures in South Africa and whether you, the business owner, can be held personally liable for debts incurred.
With sole proprietorship, you and your business are viewed as the same legal entity. Although it is the simplest way of setting up a business, the big drawback is that you are solely responsible for both the assets and liabilities of the business. If things go wrong, you will be held personally liable.
Partnerships share virtually all the inherent characteristics of a sole proprietorship but with one significant snag. Each partner is personally liable for all of the business debt but should any or all of the partners be unable to pay their portion, you, as the only liquid partner, will be expected to settle the debt in full. Failing that, the creditor will be entitled to grab your personal assets in lieu of payment!
Close Corporation (CC)
South Africa is in the process of phasing out close corporations and no longer registers new entities. Limited liability rules, however, still apply to existing CCs. Although you and the business are identified as completely separate, there are occasions when your personal assets can be at risk:
Personal guarantee or signed surety if youve signed surety for a bank loan, property lease or line of credit on behalf of the CC, you have, in fact, surrendered limited liability and will be held liable in your personal capacity should the business renege.
Fraud if you have lied or misrepresented any of the facts when applying for a business loan, you will have to pay the business debt out of your own pocket.
Private Company (Pty Ltd)
A Pty Ltd is the ideal choice when setting up a more structured business with a clear separation between ownership and management. The personal assets of shareholders are protected by limited liability, whereas appointed officers and directors may only be held personally liable if they are deemed to have acted recklessly while fulfilling their duties.
Consult Specialist Corporate Attorneys
One of the ways of pre-empting any debt problems and potential personal asset grabs is by consulting a law firm specialising in corporate and commercial law. The sooner you deal with the problem, the sooner it can be resolved.
Cape Town lawyers, De Vries, Shields and Chiat, have practised and proficient consultants who specialise in the re-engineering, and the associated re-structuring & financing, of corporate liabilities of listed and unlisted companies. Browse www.dsclaw.co.za for more information on the bouquet of services provided, or to set up an appointment online.