Business Risk Strategy
The principals behind any business will invariably encounter requests or demands that have the effect of making them personally liable. Common examples are personal guarantees of directors for bank finance involving a new company, and similar requests by Landlords in respect of company’s leased business property.
Forming a company though which you do business does give the protection of a limited liability i.e. all debts rest with the company and not the directors or shareholders. Creditors cannot look beyond the Company to recover debts due by the Company to them. When starting a business people should consider whether personal liability is an issue for them. There are other considerations when setting up a business through a company e.g the need for resident Irish directors, compliance with annual returns, the taxation of company profits. In Ireland the corporate tax rate for companies is currently 12.5%. There is further taxation on director’s salaries when drawing from any company. If you do not incorporate, and with the exception of newly introduced limited liability partnerships, every debt of the company is the personal liability of its owners.
Any company requiring bank or engaging in business finance or commercial leasing will invariably find the obligation of personal guarantees of the directors being raised. If granted this imposes the payment and liabilities of the company on the Directors of the company or other guarantors. In the case of a business lease, these obligations lie to to the Landlord for the rent, and the further payment of rates, insurances and all other outgoings payable under any such Lease or Licence.
Even in the case of conducting business through a company, personal exposure to some degree is something people should expect, certainly where there is no trading history or company value to consider. If people are subject to personal guarantees then planning an exit strategy is important to minimise the personal risk. As part of negotiations, discussions should be had with the Bank or Landlords as the case may be as to the conditions on which the guarantees are to be released. This is usually based on achieving a certain trading position after an agreed period of time (e.g. two to three years).
In the context of leasing business property a second option can be, having agreed the date by which the guarantee will expire (usually subject to compliance with the therms of the lease), people can further limit their exposure by capping the amount that is covered by the guarantee (e.g. capped at the value of three to six months rent). These actions will enable the business owners or directors to quantify the personal risk in real value terms and reduce the exposure overall.
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