Why Businesses Need to Document In-House Arrangements

Relevant For:

Business owners and managers, especially those looking to protect their assets and manage risk effectively.

Key Points:

  • Proper documentation is essential for effective risk management and asset protection.
  • Have formal agreements (lease, licence, loan) between entities.
  • Understand the importance of PPSR registration to protect assets.
  • Include succession planning to prevent financial stress and disputes after death.

Full Article:

From the outset of establishing a business, it’s crucial to consider limiting liability and protecting assets. A key component of risk management and asset protection is separating business risk from assets through a dual-entity structure. Here, one entity, such as your proprietary limited company, operates the business (Operating Entity), while another entity, like a trust or self-managed super fund, owns the business assets (Asset Owning Entity). The Asset Owning Entity makes these assets available to the Operating Entity under a lease, licence, or loan agreement.

This setup allows the Operating Entity to use the assets without exposing them to creditors if the business fails, as the assets remain with the Asset Owning Entity. To effectively implement this strategy, two critical steps involving documentation are required:

Step One: Formal Agreements

Ensure you have formal lease, licence, or loan agreements between your entities. These documents confirm that the assets are owned by the Asset Owning Entity and are only used by the Operating Entity. Proper legal advice is essential to draft these agreements, which should detail the assets and any fees payable. Poorly documented arrangements may lead to assets falling into the hands of creditors and could result in negative tax implications.

Step Two: Registering the Security Interest

The Asset Owning Entity must register its security interest in the business assets on the Personal Property Securities Registry (PPSR). This public notice system makes it clear that the Operating Entity does not own the assets. Without registration, the assets could be claimed by creditors if the Operating Entity fails. Registering the interest ensures that the Asset Owning Entity can reclaim its assets.

Additionally, ensure real estate is owned by a separate entity, using the land title system for registration, as the PPSR does not cover real estate.

Succession Planning

Consider what happens if you pass away. Succession planning is vital, particularly for in-house loans. Document terms carefully to prevent financial stress and disputes within the family after your death. Ensure that the debtor can repay the loan and that your estate planning avoids unintended consequences.

In conclusion, proper documentation of in-house arrangements is a fundamental part of a comprehensive risk management and asset protection strategy.