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If you are a business owner there are steps you can take for protecting your personal assets from a business disaster. It is best if these steps are taken when the business is started.
Most people think it will never happen to them. However, business disasters do happen! In my practice I have seen many disastrous results of business owners who did not exercise even the simplest of some of these tips, only to lose their home or retirement funds or their life savings.
One of the first considerations in protecting your personal assets from a business disaster is whether the business is incorporated or not. Incorporating the business offers various protections for a business owner.
- Get professional advice. An accountant and a lawyer can give you advice to get the business off to a good start and for protecting your personal assets from a business disaster.
- Only one spouse should be a director. Limit family exposure to risk. Directors are responsible for any outstanding source deductions, GST and provincial tax.
- Be loyal to the business’s statutory creditors. Always pay statutory debt on time. Statutory debt owing is a personal liability of directors.
- Don’t have significant assets in your personal name. You can have all your significant personal assets in your spouse’s name for protecting your personal assets from a business disaster. This works best if you have a strong marriage.
- Avoid giving personal guarantees to suppliers or a landlord. In some cases such as dealing with a bank you must give a personal guarantee or you will not get the loan. In many cases simply stating that a personal guarantee in not available will suffice.
- Have only the corporation borrow funds from the bank. Don’t allow the bank to lend the money to you personally. Structuring the debt this way will mean that if the business fails the bank will be paid funds from the sale of the business assets first and will only look to your personal assets if there is a shortfall after liquidating the business assets.
- If a family member lends money to the business that person should take back security for the loans. The security documents and the registration of the documents must be done by a lawyer. This way, if the business fails the family member will get paid ahead of unsecured creditors thus protecting personal assets from a business disaster.
- Contribute to an RRSP if your tax bracket means a tax savings. RRSPs are exempt from seizure by your creditors and by the trustee in case of a bankruptcy. In some provinces all funds in the RRSPs are exempt and in other provinces the contributions in the 12 months prior to bankruptcy are clawed back for the benefit of the creditors.
- Have a plan for a successor for the business. A strong business must have a strong succession plan so the business can carry on or be sold when the owner decides to retire.
- Be cautious of rapid business expansion. There are risks involved as well as opportunities. Many businesses have failed because they took on a huge project and later found out that they under bid the job. Another danger is opening up a branch in another location when you don’t have skilled enough staff to run the branch.
- If the business incurs financial difficulty seek professional advice early. Acting quickly may give you time to correct the problem and have the business survive.
- Know when to quit. Carefully consider the problem and decide how much time and money you are prepared to put into saving a troubled company.