Business Management Articles
Are You Risking Your Financial Security?
Mississauga Business Times
Bob McMahon
For business owners, their enterprise is often their most valuable asset. Yet too many risk their businesses, their retirement plans – even their own and their family’s personal financial security – because they haven’t put into place sufficient asset protection strategies.
An important aspect of operating a company effectively involves proactively managing the risks that are an inherent part of doing business. Well-managed enterprises have in place safeguards to protect those who lead the business and their families. Following are some of these important strategies – review them with an eye as to whether you and your family are at risk – or well protected.
Insurance is a good place to start. You should have sufficient insurance to cover the significant risks of doing business. This can include a comprehensive liability and property insurance policy along with specialized policies for the risks specific to your own type of business.
Key person insurance is another consideration if you or members of your management team are essential to the operation of the company. These policies help to keep the cash flowing in the event that a key employee leaves, dies or is disabled and the organization has to adapt to the loss.
If your business is incorporated or you have one or more partners, a partnership or shareholder agreement is vital to reduce the risk that disputes may cause the demise of your business. An agreement can include remedies to avoid problems related to the departure, disability or death of a partner, financing, defaults, share transfers, the sale of the business, employment contracts, security interests – these and other issues that could jeopardize the continuation of the enterprise.
A succession plan is another invaluable financial protection tool to ensure your business can continue to operate in the event of your disability or death. You should have a plan that documents your wishes for transferring your business to others and sets out the steps for the transition.
Many business owners choose to incorporate because it protects them against unlimited personal liability for debts and obligations of the business.
It is important to know, however, that directors of corporations may still be personally liable under dozens of federal and provincial statutes. Incorporation does not offer protection against unremitted payroll deductions, GST, PST, unpaid employee wages, employee source deductions, vacation pay and many other liabilities. This is why additional layers of protection are necessary, such as liability insurance for directors.
As well, you can further diversify business risk by establishing a holding company that receives and invests surplus income generated by the principal operating company through tax-free inter-corporate dividends. In the event of claims by creditors, this strategy minimizes the assets available in the operating company.
You can hold the shares of the holding company directly or through a family trust for even more protection from claims. The holding company can also lend funds back to the operating company under a general security agreement, giving the holding company a priority claim on assets ahead of unsecured creditors.
As well, you can set up a holding company to own the assets required to run your business so these assets cannot be seized by creditors of the operating company. The holding company could own such assets as real estate, equipment, vehicles, furniture, fixtures, copyrights or patents and lease or license them to your operating company.
If you have more than one business location or division, you can also diversify your risk by incorporating each one separately.
If you have family members who work in your business, be sure to limit their exposure to liability. Your spouse should not be an officer, director or shareholder of your corporation. Any family members who serve on your company’s board of directors should not own the family’s personal assets and you should also limit the number of family members on the board to minimize the family’s overall risk.
When you own an incorporated company, you can protect any financial investment you make in the business with a security agreement. In the event your company later runs into financial trouble, the agreement provides you with a priority claim for assets above unsecured creditors. You can accomplish this with a general security agreement on all of the company’s assets. Or you can establish a collateral mortgage for land or a building. Or you can set up a chattel mortgage on specified equipment or vehicles or inventory.
When it comes to investing in your company, consider Canada’s Small Business Financing program. The program offers loans up to $250,000 for the purchase of such assets as real estate, leaseholds and equipment. Personal guarantees are limited to 25 per cent of the total amount loaned. This limited personal guarantee helps minimize the personal capital required to finance the business and can free up liquidity for the business to repay loans from the shareholders of the company.
Protection strategies such as these are integral to the well-managed business. With the right safeguards in place, you’ll have the confidence of knowing that your wellbeing and that of your team and families is protected – and you can focus on building your company.
Bob McMahon is a senior manager of BDO Dunwoody LLP (www.bdo.ca). BDO, one of Canada’s leading accounting and advisory firms, helps entrepreneurs and family businesses succeed. You can reach Bob in the Mississauga office at bmcmahon@bdo.ca or (905) 270-7700.
This article was originally published in Mississauga Business Times, Sep 2008.
