Trusts and Business Owners
Pilots have a saying along the lines of: flying is 99% boring, punctuated with a few moments of intense fear. Their entire effort is geared towards eliminating those few moments.
When you are 20,000 feet above ground any small aircraft failure can spell death. So pilots are absolutely pedantic about checking and re-checking every aspect of their airplane before they leave the ground. There are only two types of pilots - careful pilots and dead pilots. And there are very, very few dead pilots.
In contrast, we little guys take to the entrepreneurial skies in anything- ranging from the original Wright brothers vehicle, via refurbished WW2 fighters and bombers, to the latest, state of the art stealth bombers. Yet, astoundingly, most of us do not perform the basic checks needed to ensure a safe flight - so 96% of us experience a business failure - resulting in 5 years of intense fear.
It doesn't matter what business vehicle you fly - there are a few basic rules that will save your life. The most important of these is a simple concept known as compartmentalisation.
Compartmentalisation is where you take simple steps to protect the various components of your business vehicle. For example - a parachute that will protect the most important component of your business system - YOU. Or some protection for your assets should the business vehicle smash into the ground in a flaming heap - like the protection built into the legendary 'black box' that holds all the information about the flight.
Thank heavens there is a legal mechanism that allows each of us as much protection and security as we want, and it can be used to answer a whole bunch of nasty questions.
Let me share a few of these nasty questions:
- The unlimited surety I have signed means that my home, furniture, and life savings will be sold off to pay business debts if the firm fails. How do I prevent that?
- If SARS claims that I owe them money, my home, furniture and life savings will be auctioned off to pay them. How do I stop that?
- If I get divorced, my spouse can claim half my business as part of the settlement. How do I force a negotiation without being held over a barrel?
- I am married in community of property - which means that both myself and my partner are completely exposed to anything bad that happens in my business. How do I protect my life partner?
- I am trading as a sole proprietor, or in a partnership, which means that I am personally responsible for all business debts. How do I limit the damage so that I don't lose my home, furniture, and life savings?
- My business is shaky right now, and I might have to close in the next few months. What can I do now to limit the damage to my family and my life assets?
I owned a solid computer business from 1984 to 1992, competing successfully with IBM in a niche market [connecting PCs to IBM minicomputers], before I was forced to close the firm in June 1992. Like almost every other business owner I had signed a few personal sureties while running the business, so the closure cost me everything I had worked for until then - my family home, the vehicles, the furniture, my savings, my investments, and even the watch off my wrist! This single legal entity would have saved me millions of rand in [mostly frivolous] judgments.
The answer is so unbelievably simple that most of us cannot believe how easy it really is! So we ignore it. Or we allow ourselves to be bamboozled by experts who assure us that it is complex. [How else can they justify charging such huge fees?]
The answer is a simple legal document called a Trust. Structuring a Trust in your life will answer all of the questions I asked above - as well as a few more.
This simple method of protecting your stuff is called a trust. It's a very old legal structure, which dates back to medieval England when landowners faced the loss of their property in taxes - so they devised this nifty idea. Why not entrust ownership of the land to the Church, and have the Church look after it for them? This way they got all the benefits of the land without the burdens of ownership. Since then, trusts have become an established legal concept in most English speaking countries - including South Africa.
Interestingly, we tend to think that trusts are only for rich folk because they have so much to protect. But that's nonsense. The less you have, the more you need to protect it. Richer folk typically can recover from a business failure much faster than poorer people. But if you're already struggling somewhere close to the bottom of the economic pile, how much more important isn't it to secure what you have before it gets worse?
You see, a Trust can be used in a number of places critical to us business owners. It can be used in the form of a Family Trust - which allows you to compartmentalise all the your personal valuables away from your business risks - or any other risks. Structuring such a Trust can save huge life assurance expenses pays for itself quickly because it means you need a lot less life assurance.
- Or you can use a Trust to hold any property you might own in the future. This ensures that the property is compartmentalised, once again, from any risks - especially from your business.
- Or you can use a Trust to own the shares in your business - which compartmentalises all the risks into a single box - away from your assets and your family.
- You can even use a Trust as a trading entity to cut administration and inconvenience, as well as slash the taxes you will be liable for should you inconveniently die in the saddle - so to speak.
The smaller your business, the more benefits a Trust structure holds for yourself and your family. Trusts are not just for rich folk - who can often afford to lose lots of stuff. The closer you are to danger, the more important this protection becomes.
You form a trust in South Africa, typically, by briefing an attorney. [Briefing is an expensive word that means telling an attorney your details.] S/he drafts a trust deed [a short novel in which you and your family feature] and this is registered with the local High Court. Once registered the trust operates as a separate legal entity. And the mere fact that you have a trust immensely complicates the life of anyone trying to attack you.
Trusts have a pragmatic value far above their legal value. Most folk will give up the attack as soon s they find out about the trust - because it confuses the issues so much. And it costs a lot of money for the attacking attorney to sift through the issues. Which means that most folk will walk away. The legal value kicks in when you have a large creditor who has the funds and the will to attack you.
Is it complex? I don't think so. It's a bit like my car - a simple cover hiding some very complex systems. Yet when I turn the key and the engine bursts into life, do I ever worry about the complexity? Not really. Every 15,000 KM I have the car serviced. That's what you do with your trust as well.
This single legal instrument answers a whole bunch of terrifying entrepreneurial nightmares. Yet our professional advisors often focus on the mechanics of the product, rather than the solutions it provides. That's like a parachute supplier discussing the merits of nylon vs cotton - and so confusing you in the process that you never get the parachute!
For what it's worth, in the bigger firms we all deal with - all of the employees have parachutes. They [and their families] will never be held personally accountable for any challenges their business faces. They simply drift onwards to another job. About the only time they get hurt is when they get caught red handed with their pants down with a finger in the cash register - and even then they probably won't get prosecuted! Yet we feel the need to risk everything we own - every day. Indeed, we're even bludgeoned into doing it by these same employees in bigger firms who insist that we sign sureties because if we won't stand behind our firms why should their firm! How fair is that?
I have been hosting the Trusts for Business Owners Seminar since 1999, and thousands of small business owners have learnt exactly how and why to structure trusts into their business efforts. I have lost count of the number of them that have been saved by these structures - but here is a simple example:
Hi Peter,
Three years ago I attended one of your seminars and was suitably terrified by the contents thereof. Whilst unfortunately not following all of your advice, I did invest in the establishment of a trust and proceeded to purchase properties etc. therein. I recently had an off-shore contract turn sour on me forcing me to have to voluntarily liquidate all my companies.
Whilst I was forced to sign personal surety with two suppliers prior to this, I am at least in a situation where owning nothing in my own name, the suppliers are not able to destroy me financially, and I have the opportunity of negotiating terms and future contracts with them on a less stressful (for me) basis. Many thanks for the effort you put into the community of entrepreneurs who take on the might of the monopolies daily.
When you left this seminar you knew exactly where a Trust would add value to your life as an entrepreneur. We covered all the structures in enough detail so that you could make informed decisions about:
- What you can legally put into your Trust, how to do it, and how long it takes...
- Where you can save on the variety of taxes that we entrepreneurs face - PAYE, CGT, UIF, SDL, Income and Company Tax, STC...
- How your Trust can cut your business and personal life assurance costs...
- What the ideal small business legal structure is, and why...
- Whether you qualify for a Trust structure, and why...
- In fact, everything you need to know as a small business owner about surviving a major business setback.
Each year, in February, the government moves the goal posts regarding taxes, subsidies, and business structures when the Minister of Finance presents his annual budget. Trusts have
I stopped hosting seminars a few months after this article was published. One of the biggest challenges I faced was that the seminars left people with far too many questions, and me with far too little time to deal with those questions. It made sense to look at a new mechanism to support business owners. In March 2004 I founded the Business Warrior community which has proven an excellent way of being able to continuously support business owners - Trusts, knowledge, referrals, introductions, marketing, and a whole lot more. Please check us out at www.businesswarriors.co.za
Warm Regards
Peter Carruthers
