Companies have been a popular business structure to set up businesses and also invest in properties.
Currently, companies enjoy a standard 28% tax rate and shareholders have limited liability.
However, especially for closely held companies such as a mom and pop investor who set up a property investment company to holds their rental properties, the shareholders and directors are usually the same or have significant overlap.
In New Zealand, directors sometimes have to guarantee the debts of the company so this can open the director (who is usually a shareholder) to various claims from the company’s creditors.
This is how creditors can go around the limited liability of shareholders who also act as directors. Even if you are not a shareholder, there is significant liability with being a director.
A case in point is Mainzeal.
The High Court has ruled that Mainzeal traded while insolvent for nine years and upheld claims of reckless trading made against four directors, including former prime minister Dame Jenny Shipley.
Some of the former directors may have to contribute towards $36 million to settle creditor’s claims.
What this goes to show is it is important to get your structure right.
Trusts can help in this regard and if done correctly, will give you strong asset protection and as a bonus can help generate tax savings.
If you want to know more about investment trusts, email us at email@example.com