Risk of Somebody else Starting a Business in Your Name

Start a Business

I was recently asked: Should I let somebody put their business in my name? A further catch, was that the third party who wanted to use another’s name to set up a business was a family member with a failed business with negative financial information and ratings.

Should you accept the Risk of Somebody Else Starting a Business in Your Name?

Do not let somebody else start a business or put their venture in your name. At the outset, and as harsh as this may sound, there is probably a reason why that other person’s current business has lawsuits and debts against it… Whether that situation came about as a result of bad luck, bad management or a combination, you would be very exposed in your personal finances if you allow them to put the new business in your name.

The situation does vary depending on the country in which you are based, but the general rule is that if the business is in your name, then you can be held personally liable for all debts. If the new business was to fail, even if due to bad luck rather than bad management, it would put your personal financial standing at great risk. Assets that you might own, like a car or house, or even financial holdings like shares, could be attached and sold to defray the debts of the business (obviously there is a legal process involved). You would probably not be able to defend the case on the basis that you “fronted” for somebody else!

Put Your New Business in a Limited Liability Company

The more advisable route, if possible in your country, is for the new business to be put into the name of a limited liability company. That way, and particularly if you have a strong credit record, you do not undertake the risk of somebody else starting a business in your name.

Most countries have some version of this and it protects the members or owners, to a large degree, against personal liability. Although the owners can be held personally liable for debts in the case of gross mismanagement and fraud, many other debts will “belong” to the company. A limited liability company can mean a “close corporation (CC)”, “Proprietary Limited (Pty) Ltd”, “Public Company (Ltd)” and many more.

The essence of these types of company is that they are created to be a separate and distinct juristic entity – that is to say that the law recognises them as a separate person from the individuals who manage it, capable of owning assets and incurring liabilities. Some of these juristically separate companies are more expensive to start than others, have greater legislative compliance requirements (an example of a compliance requirement is providing audited financial statements on a yearly basis) and certain minimum capital requirements (thousands of $ or Euros). Most countries, however, also have a smaller and more user-friendly limited liability business type aimed at encouraging growth of entrepreneurial activity.

The only circumstances in which I would allow any business to be in my name, would be if I had a shareholding (or percentage ownership) in the business, and was actively participating in its management. Otherwise, I would be exposing myself to lawsuits (which cost a lot of money to defend) and making a permanent mess of my credit record (possibly even preventing or limiting your access to credit in the future). If you are involved in the management, you can at least have an idea of what is going on and if bad decisions are constantly being made – then take preventative or protective measures. There is enormous value in keeping your personal credit record clean, which is quite a rare accomplishment in the current economically tough recession most of us are experiencing. At some stage in the future, you may wish to start your own business, and a blemished credit record will only make that more difficult. Starting your own business is a hugely exciting venture, but it is also very challenging – don’t create additional challenges for yourself by allowing somebody else to potentially tarnish your reputation.

Please bear in mind that the above is applicable in the country in which I practised law, but it is not necessarily 100% applicable in yours. It should however give you a good guideline and also give you an idea of what questions to ask. I suggest that you pick a few brains of people around you…

Finally, and in answer to the original question posed as to how you go about declining when a family member want to start a business in your name… I would suggest thanking the family member for the opportunity but declining firmly. The risk is too great and you can quite honestly point this out to them – the world economy is in a bad way at the moment and right now is not the time to put yourself at risk. If you have any intention of buying a house or other assets, this could be severely hampered by your association with the new business. You would pose too great a risk to lenders, like banks because of your exposure to large debts through your association with the new business.

The risk of somebody else starting a business in your name is most likely not worth the perceived reward and I strongly discourage the practice.

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About rudiernst

I practiced as a qualified attorney for a number of years before leaving the legal profession in search of avenues to explore my great passion - business! I'm now part-owner and MD/CEO/general dogsbody of a small ecommerce business. We own and operate a number of online stores selling a huge array of products in South Africa, SADC region and Europe. My business? Your success! is about sharing business experiences with aspiring, young, South African entrepreneurs - to give them access to insights of numerous successful entrepreneurs familiar with the unique operating environment of the South African businessperson. The purpose of the website is to make information available to entrepreneurs in a series of easily understandable articles, each focusing on a different business lesson and highlighted with everyday experiences.