How can I protect myself from my life partner’s business debt?

Starting a business may not be on your bucket list, but if your life partner is itching to follow an entrepreneurial dream, make sure you are financially protected, whether the venture succeeds or not.

Stay close to the action

Get involved from the early stages as a sounding board for ideas, taking time to really listen and pledge your long-term support. Realise that there will be impacts – apart from financial, your partner’s energy and time will be devoted to making the business succeed.

Your relationship may move to the back burner, so being involved will leave you feeling less isolated and more part of the process.

Family finances

Your partner may not be earning a salary for many months, so you need to figure out how to manage this shortfall in the interim.

Ideally you will have some household savings to tide you over, but if it’s not the case, it’s time for an honest discussion with your partner, unpacking the implications and finding workable solutions:

1. By how much will the household income be reduced?
   
   
2. Can you trim your living expenses sufficiently?
   
   
3. Can you fund the shortfall from your income?
   
   
4. Is incurring personal debt to fund monthly shortfalls an option?
   
   
5. Should you dip into your personal savings?
   
   
6. How long can you survive without a regular second income?
   
   
7. How long will it take for the business to start generating a profit?

 
Minimise risks

Funding a new venture can be a challenge and you don’t want your partner using their retirement savings or your (shared) family savings for start-up costs.

You also need to protect yourself from the consequences of your partner incurring debt by:

• Understanding how the business will be financed and if any assets have been used as security for loans. Even if you’re not legally liable for the business debts, this could affect you if the business is liquidated.
  
  
• Avoiding debt in your name to help your partner start a business or boost a fledgling business, as this can damage your credit score and put you at risk.

• Keeping the business and your personal finances completely separate from one another. Blurring the lines can negatively impact on your household cash flow and lead to inaccurate record keeping and information management as the business grows.
  
  
• Understanding how your marital contract (if you’re married or in a civil union) and the type of business your partner starts, could impact on you.

Future proof your money

Have your own investments and create your financial security that is completely separate from the business. 

Consider a retirement annuity (RA). Even if you were liable in the future for some of the business debt, your RA is safe from any claims from creditors. It’s also a clever way for your partner to provide security for him or herself, safe from business risks. Read more: How do retirement annuities allow me to create my own retirement savings?

Till debt us do part?

If you’re legally married or in a civil union, your marital contract will determine whether you could be held liable for your partner’s business debt.

A civil union enjoys the same rights, responsibilities and legal consequences as a marriage, so understand the impact of your contract.

Your contract may be:

• In community of property

In this case both partners are responsible for any debt brought in or incurred during the marriage, including personal or business debt, and if the business filed for insolvency, the joint assets could be sequestrated. 

• Out of community or property, with or without accrual

In this case each partner is responsible for their own debt and you cannot be held liable for the other’s debt, so you are safe from your partner’s business debt.

When business debt gets personal

Your partner could be held personally liable for any business debt, depending on the type of business they start, the nature of the surety they have signed and if you’re married in community of property, you could also be held responsible.

This is how some business structures could impact you:

• Sole proprietor

This business is owned and operated by an individual and it is not a separate legal entity. All income belongs to the owner, who is also responsible for all business debts.

• Partnership

This venture is undertaken by a group of individuals. It’s not a separate legal entity and partners are responsible for the debts of the business. Creditors can pursue any partner.

• A Personal liability company

This is a private company generally formed by professionals such as attorneys, engineers or accountants. The shareholders and directors (past and present) are responsible for any debts of the company.

Where you are safe

Certain business structures are separate legal entities so shareholders and employees can’t be held liable for the debts of the business.

Directors, however, can be held liable if they are negligent in their duties and not acting in the best interest of the company. These include companies – private companies, public companies or non-profit companies as well as close corporations.

Protect your involvement

If you are actively involved in the business, protect your interests from any negative impact caused by a partner or key person (someone with specialised skills) becoming ill or dying. Key person insurance pays out on the death or illness of a partner or key person, ensuring that the business can continue smoothly.

A buy-and-sell agreement can also help protect you if business partners take out life and disability cover on each other’s lives. In the event of one partner’s death or disability, the proceeds from the policy allows the other business partner(s) to buy the deceased or disabled partner’s business share, allowing life partners or dependants to inherit the value of the business.