How to protect the family home when starting a business

When a person starts a business, the focus is strongly on creating that business and doing whatever it takes (within reason) to make it work. And, fair enough — there’s a lot to think about. From initial business plans to branding, marketing, budgeting, hiring staff, taxes, and so much more, a new business venture is expected to take up considerable time. 

In most cases, people are pretty confident when launching a business. After all, it’s such a huge undertaking, you would have to be self-assured to go ahead with it. We commonly hear the phrase, “I never thought my business would fail”, but sadly, sometimes this is the case. 

What’s more, in the excitement and stress of the launch, sometimes, little consideration is given to what will happen if the business venture doesn’t work out. 

When it doesn’t work… 

When a business venture fails, an immediate thought will be about your income, and how you’ll provide for your family whilst sheltering them from financial hardship. Keeping the family home is a particular concern. 

The good news is, you can take some initial steps before the launch of your business to protect your family to some degree, without incurring a lot of costs. 

1. Avoid a partnership business structure to protect the non-business partner’s half interest in the family home and other assets. 
2. When using a corporate structure, only the businessperson should be a director of the company. That way, the non-director’s half interest in the family home and other assets are protected. For example, the non-director partner is not exposed to liability from personal guarantees and Director Penalty Notices from the ATO. 
3. Holding the family home as Tenants in Common rather than as Joint Tenants (we have a good article on the differences here). The reason for this is if the non-director partner should die, the half interest in the house will be dealt with by the non-director’s will. This contrasts with the house being held as Joint Tenants, in which case the non-director’s half interest in the house will automatically pass to the director upon death — leaving the entire house exposed to the director’s personal guarantees and the ATO Director's penalty liability. 
4. Have the business person only use their share of the equity in the family home to support business borrowings. 
5. Ensure future family home purchases are in the name of the non-director spouse where possible. Or, look at changing the ownership of the family home.   

Plan ahead. 

If total business failure occurs, the financial pressure on the family is reduced if the non-business partner’s assets remain intact. For the businessperson as an individual, the aim is to have a go, doing everything for the business to succeed. For that same businessperson considering their family, the strategy is to not have all eggs in one basket. 

Contact us to talk about this in more detail — we’d love to help you set your business up for success, as well as safeguard against the worst.