How business owners should ringfence their personal wealth to avoid setbacks
Source: Live Mint
Rajiv faced simultaneous challenges – dipping cash flows in his business and the legal claim that threatened his personal savings. His story underlines a critical lesson for Indian business owners: the importance of ring-fencing personal and business assets.
Even after his diligence in expanding his business, Rajiv’s financial strategies were reactive. His personal savings were tied to the company’s working capital and his assets – properties, fixed deposits, and investments – were intertwined with business liabilities.
Rajiv’s lack of asset segregation left him vulnerable, a common scenario for entrepreneurs who rely on short-term fixes instead of building long-term financial defences. How can business owners like Rajiv safeguard their wealth from risks associated with entrepreneurship?
A framework
To secure their personal and business finances, Indian entrepreneurs must adopt structured strategies related to segregation, legal safeguards, insurance and contingency funds.
Segregation
The first step in asset protection is to ensure that personal wealth and business finances remain separate:
Set up separate accounts – Maintain distinct accounts for business transactions and personal expenses.
Register your business appropriately – Choose a private limited company or LLP over a sole proprietorship to limit personal liability.
Document loans clearly – Avoid informal loans between personal and business entities.
Legal safeguards
Business owners can use legal tools to shield personal wealth:
Family trusts – Transfer personal assets into a family trust to protect them from potential lawsuits.
Will and estate planning – Ensure clear succession planning to prevent disputes or unintended transfers.
Agreements and contracts – Draft detailed contracts with vendors and clients to reduce litigation risks.
Insurance
Insurance is a cornerstone of financial protection:
Keyman insurance – This policy compensates the business for financial losses resulting from the demise of a key individual.
Professional indemnity insurance – This protects against claims for professional errors or negligence.
Health and life insurance – This secures personal finances against medical emergencies or loss of income.
Contingency funds
To weather market downturns or legal challenges, business owners must build financial buffers:
Emergency funds – Allocate 6-12 months of expenses for both personal and business contingencies.
Diversified portfolios – Spread investments across equity, debt, and alternative instruments to reduce concentration risks.
Liquid assets – Keep a portion of your wealth in easily accessible instruments like fixed deposits or liquid mutual funds.
Investments
Many Indian entrepreneurs prefer real estate as an asset class. However, overexposure to this sector can be risky.
Recent trends suggest stagnant appreciation in residential properties. Instead, consider investments in commercial property through REITs (real estate investment trusts), offering liquidity and stable returns.
Tax efficiency
Tax planning plays a crucial role in asset protection, offering several avenues for business owners to optimise their financial strategies. Investing capital gains in Section 54EC bonds can help reduce tax liability on the proceeds from property sales, providing a tax-efficient way to manage profit.
Utilising Hindu Undivided Family (HUF) accounts allows for both tax benefits and the creation of a separate legal entity for managing family assets. Additionally, leveraging GIFT City platforms enables investments in global markets with the advantage of tax exemptions and simplified compliance, making it an attractive option for entrepreneurs seeking diversification and efficiency.
Finding balance
For Indian business owners, the key to achieving a balance between growth and protection lies in creating a robust safety net without compromising the potential for expansion. This involves reinvesting in the business cautiously by focusing on core growth areas while keeping personal reserves secure.
Engaging professional advisors such as financial planners and legal experts can help craft a comprehensive asset protection strategy tailored to specific needs. Additionally, periodic reviews are essential to ensure that investments and protective measures remain aligned with evolving goals and risks, fostering stability and sustainable growth.
By adopting these strategies, entrepreneurs can focus on scaling up their businesses without compromising their personal financial security. The essence of ring-fencing lies in proactive planning—a lesson Rajiv learnt the hard way.
Through disciplined financial practices, Indian business owners can fortify their wealth and ensure long-term stability, come what may.
Tarun Birani is founder and CEO of TBNG Capital Advisors
