10 key decisions for business owners
Key decision 5 - How will you reduce your risk?
As a business owner, you’ve worked hard to accumulate your assets, so it is important to take precautions to protect them from risk. Following are some strategies that may help.
Protect personal assets
- Gifting assets.If you gift assets to family members you may reduce the amount of assets that may be available to your creditors, but bear in mind that those assets may now be at risk from creditors of the family members who receive them. Unless the gift is to a spouse, it’s considered a sale at fair market value for Canadian tax purposes and could potentially trigger a capital gain.
- Using insurance.Depending on the province where you live, placing funds in an insurance policy (life or segregated funds) may safeguard them from potential future claims. In many cases the investment component of an insurance policy and the interests of the beneficiaries under the insurance policy may offer protection from the claims of creditors.
- Sheltering assets within registered plans.Funds in a Registered Retirement Savings Plan (RRSP) are potentially protected from creditors in certain provinces.
- Transferring assets to a formal trust.The legal ownership of the assets passes to the trustee so, if properly structured, these assets could be protected from future creditors. However, you may lose control over the funds transferred, depending on the nature of the trust. Determine whether you can afford to transfer control of those assets. Remember there could be significant tax implications to placing assets in a trust, so obtain professional advice to ensure you understand the consequences before you make a decision.
Safeguard your business
When you’re working on a strategy to protect your business assets from risk, certain actions can create the impression that you intend to put assets beyond the reach of creditors. This can work against you in the event of a lawsuit and can be particularly important if your company is experiencing financial difficulties. Try to avoid the following:
- Transferring property for less than fair market value
- Paying for property by cash instead of cheque
- Transferring property without proper documentation
- Transferring property where the transferring person retains an ongoing interest or continues to behave like the property owner
- Transferring property without a change in possession
Benefits of incorporation
Incorporating your business may be one way to protect personal assets. As an owner-manager, you are only liable to the extent of your shareholding, so you are not personally liable for the debts of the company. Compare this with sole proprietors, who are personally liable for all the debts and obligations of their businesses and partnerships where you can be personally liable for the actions of other partners. However, if you do incorporate, be careful about giving personal guarantees for loans to your business. The protection provided by incorporation can be lost in such a case and you could be personally liable for repayment of the loan.
Surplus assets in your business
Aim to keep cash reserves as low as possible. If you have accumulated surplus assets in your business that you don’t need for operating expenses, consider transferring them to a holding company. This can help protect them from creditors of the operating company. You should also consider the pros and cons of having your company contribute to an Individual Pension Plan (IPP). This can help boost your retirement funds and assets in an IPP are creditor protected.
This article is supplied by Scott Donovan, an Investment Advisor with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.