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Financial Troubles
This is a series of columns that appear in Okanagan Business Magazine
This is a series of columns that appear in Okanagan Business Magazine
"Recently my business has not being doing well and I would like to know if there is anything I can do to protect my investment and my assets if my business goes under?"
This is a common concern among business people that can be alleviated or minimized with proper advance planning, however you cannot set-up your affairs to avoid an imminent debt, or the results of an upcoming bankruptcy. When a business begins to fail, it is too late to begin planning to ensure that assets are beyond the reach of creditors. However, prior to that time, you are able to structure your affairs as a general matter of advance planning to minimize assets exposed to creditors.
One method for limiting asset exposure relates to the structure of your business. If you are carrying on a business personally, then you are personally liable for the debts of that business. However, if you incorporate your business, then the corporation is liable for the debt and not the individual shareholders. This structuring will prevent many liabilities of a failed business from haunting an individual shareholder.
If you are not incorporating, or you intend to operate a business personally, you may want to transfer any substantial assets to a spouse to ensure that they are not available for any future creditors. You must understand however, that this may cause possible income tax or other consequences and each transfer must be looked at with these issues in mind.
One of the common problems with business owners is understanding the impact of personal guarantees. My advice is don't give any personal guarantees for your business, but having said that, I realize that market reality sometimes requires owners to grant personal guarantees. It is important to understand the scope of any guarantees you grant and to keep copies of any documents creating a personal guarantee so that you always have reference to its terms. Where it is possible, attempt to limit the length of the guarantee in time, or the amount that you are responsible for.
Lastly, if you incorporate, you can secure your investment in the corporation just as if you were a bank. If the proper documents are drawn up at the outset and registered as required, you may secure all of the money you have advanced to your corporation in priority to all the corporation's unsecured creditors. This may give you a secured position in front of all the trade creditors, the landlord and any persons with debts owed by the corporation.
As you can see from the discussion above, there are ways to minimize the exposure of your personal assets to business debts, however the time to take those steps is before the business is in difficulty.
The opinions set out in this article reflect generally on this area of law. The impact of the law on any given situation depends upon each individual's circumstances and the opinions contained in this article should not be relied on for assessing anyone's legal position. Advice should be obtained directly from your own lawyer regarding your personal situation.
Or ideally, right from the start of the business.
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