Protecting Domestic Finances from the Family Business

Protecting Domestic Finances From The Family Business

One of the dangers of running a family business is that it can be all too easy to find domestic finances siphoned off into it, and what's more, your domestic finances may be at risk if your business gets into financial trouble. Protecting yourself against this requires an understanding of how business finance works, and it also requires an ongoing ability to dissociate business and domestic finances no matter how strong the temptation to intermingle them may be.

Different Types Of Business

The first thing you need to understand about business finance is the way it applies to different types of business. The most common type of family business is a partnership. This is an easy way to run a family concern because it's flexible, it's simple and it doesn't require a lot of paperwork. However it can leave you personally liable for business debts. One way around this is to set up a limited company of which family members become directors. This is a formal structure which does require special paperwork and the participation of an accountant (at least once a year), but essentially a limited company is itself a person in the eyes of the law, and bad things which happen to that person are not your responsibility - you can only lose funds you've already put in.

In recent years a third option has been developed - the limited liability partnership. This is perhaps the most suitable option for the modern family business, combining many of the best aspects of partnership and a limited company. It limits the amount of money you can lose and thereby gives you some security, but it's generally easier to administer.

Protecting Your Assets vs. Business Finance

The problem with setting up your family business as a limited company or a limited liability partnership is that you may find it difficult to get business loans. This is because potential funders know that they could lose their investment if your business collapses without sufficient funds to pay them back. For this reason, they may ask you to guarantee loans yourself. This means that you would be asked to sign an undertaking making you personally liable if your business is unable to repay those loans.

Obviously, signing anything of this sort is a big risk, as it neatly sidesteps all the protection which your limited company or limited liability partnership would otherwise offer you. However, in some situations you may find that there's no other way to get the money you need. In this case, see if you can find other ways of protecting yourself.

If things go wrong and you become personally liable for a big debt, your spouse and any minor children who normally live with you will also stand to lose money and assets registered in their names. However, money and assets in the names of other family members will normally be safe. If you have to sign a personal guarantee and you're worried about the risk, speak to an accountant about the practicality of transferring your assets to places where they will be safe. You can then continue to enjoy them even if you are personally bankrupt. However, you should aim to do this before any trouble actually occurs, as you may find yourself with problems if you are discovered trying to hide your assets later. What's more, you may be unable to transfer ownership of assets, such as your home, if they are specifically named in your guarantee.

Resisting Temptation

No matter how careful you are to shield your domestic finances from your business by legal means, you will always have to deal with a different kind of risk - the risk that you will find yourself overwhelmed by the temptation to dip into family funds when your business needs an injection of cash to help it achieve a specific goal, or just to keep it going. This is something that you will need to be very careful about. It may not seem like much at first - just a hundred or two here and there - but it can soon add up to a significant proportion of your domestic finances. If you think you might be particularly vulnerable to this kind of urge - for instance, if you've had problems with debts in the past - it may be a good idea to add a second trusted signatory to your bank account and arrange things so that you need their signature before you can withdraw more than a nominal sum. This can take temptation out of your hands and relieve a lot of pressure.

However you approach finance, it's vital to remember that business is business and family is family. If your business fails, it's never as serious as losing your home.