How can I protect myself, family and friends who invest in my business?
A simple practical step is to limit investments to amounts people can afford to lose. If you are trading as a sole trader (or in a partnership), you should also ensure that your spouse has a separate bank account, and that you do not give a charge over your home to secure a loan.
More broadly, it may be possible to provide some protection to investors by ensuring that their investments to the business take the form of secured loans, so that they rank higher in the list of creditors should the business fail. By contrast, investments in the form of shares will be most at risk if a company fails. However, taking investments in the form of loans may adversely affect the company’s solvency position: loans will be treated as liabilities whereas share capital will be treated as an asset. This is clearly an area in which specialist advice should be sought.
Be aware that for these steps to be effective, you should put them in place when the investment is made. Trying to protect favoured investors when the business is already in difficulties could be construed as creating preferences.