I heard many financial advisers telling their business clients to change the business type from sole proprietor to Private Limited Company because that will prevent the business owner from liability. I called that text book advice. That’s what the textbook says but as we all know, textbooks are written by academics detached from reality. Financial advisers that just follow the textbook are doing a lot of harm to their clients. It is better for these financial advisers not to give advice instead of giving such academic advice. So what is reality?

In reality, many business owners found that they have to personally guarantee loans taken up by their companies. So even if the company is a Private Limited, it is often the case in which the bank insists that the business owner act as the guarantor to these loans. (This is especially the case if the company is not an establish company or its financial statements are not strong.) Due to this reason, if the company defaults, the guarantor becomes personally liable to pay up the loan. The reality is that banks are not stupid. They know why the business owner is setting up a private limited company. In order to reduce credit risk, the bank could insist in a guarantor. Normally this will be business owners themselves.

Another reality is that certain persons in the company are also liable. Take for example, Board of Directors of listed company have the fiduciary duty towards the shareholders of the firm. If the Board of Directors would to do otherwise, they can be sued by shareholders. Board of Directors can also be sued by regulators for breach of any regulation. Take for example in Goldman Sachs lawsuit case. The CEO and the ENTIRE board of directors were named as defendants in the lawsuit by the SEC. See the news HERE.

So what all these means? It is not possible to avoid lawsuits and bankruptcy altogether. But it is possible to do some financial planning to reduce the lost if that happens. It is just like insurance – the idea is not about avoiding the risk altogether but the idea is to reduce the financial lost when the day comes.

Majority of Singaporeans cannot be bothered to do any financial planning. That’s why majority of Singaporeans can never reach financial independence. See this link HERE on asset protection: