A majority of practices get two things wrong:
- They invoice an entity which is not legally bound to pay; and
- They fail to set up a legal obligation by the party that has the greatest capacity to pay – namely, the individual or individuals behind the various entities involved.
Take this familiar situation:
Michael Smith operates his business through a discretionary trust. The trustee is Michael Smith Nominees Pty Ltd and the trust is The Michael Smith Family Trust. In addition, there is a superannuation fund with another corporate trustee and tax returns are lodged for associated individuals, such as his wife, children, mother etc.
The chances are that the family home is owned by a separate trust with another corporate trustee and Michael will have minimal assets in his name.
Invoices for work carried out will invariably be issued to the entities involved, so that the bulk of the invoicing will be to the family trust and there will also be another significant invoice to the superannuation fund. It is likely that any invoice to Michael will only be for a small percentage of the total.
Mistake number one is that the invoices are likely to be issued to ‘The Michael Smith Family Trust’ and ‘the Michael and Joan Smith Superannuation Fund’.
This presents an immediate problem, because trusts are not legal entities and can neither sue nor be sued.
The correct entity to invoice is the trustees – for example, Michael Smith Nominees Pty Ltd and the actual trustee of the superannuation fund.
Invoicing the wrong entity can cause real problems when it comes to suing. While it is legally possible to sue and get judgement against a trust, the judgement is effectively worthless as it is unenforceable. When invoicing a trust, superannuation fund or estate, always invoice the named trustee or trustees.
A further problem may well arise if the major invoice is issued to the trustee of the family trust itself.
From the tax and accounting point of view, this is the correct entity to invoice. But if the company refuses to pay, getting the money can be a torturous process, taking about six months and costing about $6,000. The accountants may need to sue, obtain judgement, serve a statutory demand and, if necessary, petition to wind up the trustee company. Unless there are significant assets in the trust itself, the liquidator will then have to seek funds owing from Michael, which may involve suing him or even instigating bankruptcy proceedings against him.
All this pain, suffering and delay can be avoided by making Michael (and preferably his spouse) liable directly for the payment of all accounts. He may well not have assets in his name, but he most likely has assets under his control (and who better to understand this than his accountant). He is unlikely to be happy about the idea of going bankrupt. He will do whatever is required to avoid that outcome.
In my experience few accounting practices take this course – yet it is easy to achieve. All that is required is to set up your authority so that it clearly provides that Michael is liable for payment of all accounts issued to all entities and people covered by the authority.
Preferably, this clause should be incorporated in detailed and specific trading terms, which Michael acknowledges in writing.
It is never too late to rectify this defect. Good clients can become difficult clients in the future. Good commercial practice is to up your client authorities properly and invoice in a manner that will allow judgement to be easily enforced.
Prushka
Prushka provides tailored trading terms for IPA practices and for IPA and their clients.
