By TIRI KUIMBAKUL
WHEN you work for a fortnightly salary, you hold all your possessions in your name. If you own a house or a car, it is your personal asset.
If anything happens to you, it affects what you own, and if anything happens to your possessions, you feel the pinch personally. You and what you own are one. If you owe debts which you cannot pay, the debtors can lay hold of what you own. Or if your vehicle runs over someone, you will pay compensation out of your own pocket.
A business is a corporate person
If you are self-employed and operate under a corporate entity such as a company, you can protect your money and other assets by keeping them under the company's name instead of your own.
This is because under company law, a company becomes a separate legal entity. You create a 'corporate person' when you register a company. This corporate person has certain legal rights enjoyed by a human person. For instance, a company can sue people or other companies, and be sued itself. So if you operate under a company and shelter your assets under it, people who sue you personally cannot easily touch your company's assets. That is how rich people protect their assets.
This is a very important reason to be in business, because today's world is very litigious. That is to say, nowadays people have become more willing to sue others and claim large amounts for small misdemeanors. In the United States, for instance, it is said that lawsuits are being filed at a rate of one hundred million a year. These cases have nothing to do with right and wrong. They are basically predicated on the desire of some parties to extract wealth from others.
'Compensation' has become a very commonly-used word in Papua New Guinea, to the extent that it has developed a culture of its own. People demand compensation for all kinds of reasons and alleged offences. In such a setting, it is vital that you shelter or protect your personal assets rather than leave them vulnerable to other people making a claim on them for whatever reason.
For example, if you invest in real estate or buy shares through a company, not many people will know what you do or own. When they find that you do not own much personally, their motivation to sue or claim compensation is likely to subside. But if they see that you have a lot of money or own many assets, they will be highly motivated to pursue court cases or even issue threats against you hoping to exact something from you. They will usually demand very large amounts, knowing that you will negotiate downwards.
The liability of company owners is limited
Another point is the concept of "limited liability" which certain companies enjoy. If you see the words "limited" or "Ltd" after an organisation's name, it is a limited liability company.
What this means is that the liabilities or obligations of the business owners is limited to the investment they have made in establishing the company. In the event that the company cannot meet its commitments to the bank or other creditors, or the company is wound up, creditors cannot touch the business owners. They can only get paid from what the company has in its name.
If the company does not have anything or much of value which the creditors can sell and recoup their money, they have to treat what is owed as bad debts in their books. They can force the company to bankruptcy but cannot touch the owners. The owners can always start another company after the first one has gone into bankruptcy.
This fact has become clear in a long-standing legal battle between two companies. One company had advanced another company a significant amount of money which the borrower refused to repay, saying that the lender had prevented it from carrying on business, as the lender was the regulator of the industry the borrower operated in. The case was protracted and expensive, taking over ten years to bring to conclusion.
When it finally came to an end, the courts decided that the borrower indeed owed the lender the money, which was computed to be principal plus interest over ten years. The amount turned out to be over K100 million. However, when the lender tried to effect the court's decision, it was shocked to find that the borrower was operating under a different company from the one which had borrowed the money in the first place. The debtor asked the court to make the company principal personally liable for his company's debts, but this was not possible. He had cleverly entered into an agreement and borrowed the money using one company, then changed the company name and transferred all his assets to the new company while the court case was in progress.
The old company did not have any assets which the creditor company could take possession of, even after the court decided in its favour. The principal himself could not be held responsible either. Even if the court decided that he should pay up, he would be declared bankrupt, because he does not own anything in his own name.
The case continues. What the lender may do is to place the borrower under receivership, which will involve someone being charged with the responsibility of seizing the borrower's assets and selling them to recoup the debt. But because the borrower had shifted assets from the old company to a new one, it is very doubtful that there will be much which the old company owns that the receiver can sell.
The important point to note in this case is that the principal of the company who borrowed the money cannot be personally held responsible for what his company owes. This is because the law gives recognition to his company as being completely separate and different from him as a person.
This is what I mean when I say that you can protect your assets when you work for yourself under a corporate entity. There is no such protection for those who work for others and own assets in their own names.
Little assets protection for sole traders and partnerships
What has been discussed above only applies to those who operate under companies. If you work for yourself as a sole trader, or in partnership with someone else, you cannot protect your assets as you can do under a company.
A sole trader operates in his own name. His assets are in his name. His liability is unlimited. If his business folds, he will be personally liable for the debts owed by the business.
A partnership is a group of two or more people who have come together to carry out business. They may operate under a business name but they are individually responsible for the business's liabilities.
Both sole traders and partnerships do not enjoy the tax advantages discussed in Chapter 18. They are charged tax at the personal income rate, which is higher than the rate applied to companies.
No assets protection for employees
I have discussed the ability of companies, partnerships and sole traders to protect their assets, to make this point: Employees cannot protect their assets. What they own is vulnerable to litigation and extortion, because they own everything in their own name.
If you work for yourself, my encouragement is for you to operate under a company so that you can be able to keep your assets under the company's name instead of your own.
Next week's article will be on tax advantages available to self-employed people in the informal sector. Email comments to secos@global.net.pg or text me on 7688 0033 or 7280 4588.
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