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Creditor Proofing Your Assets

So, you’ve built up a decently sizable company and have started to accumulate some assets and cash within it. You might own buildings, vehicles, tools or other assets in your company.

One of the most important things a business owner should think about is protecting and preserving what they’ve built. Entrepreneurs usually don’t have a personal retirement plan and are counting on their business to provide that for them. Protecting what you’ve built in your corporation is incredibly important to ensure you continue operating in the event of a lawsuit.

There are two major liabilities for business owners to be aware of:

  1. Lawsuits from customers or employees
  2. Lawsuits from creditors trying to reclaim lost capital in the event of insolvency

Let’s go over the first point here in further detail.

As protected as you may think you are, businesses are at constant risk of something happening. It could be anything from someone slipping on your property and hurting themselves, driving intoxicated from your restaurant and getting into an accident, or employees incorrectly performing jobs that put customers at risk.

The lists are endless, what’s important is that you minimize the risk of having your assets within your company at stake. The easiest strategy for you achieve this is by utilizing a holding company.

Having your operating company owned by a holding company in which the holding company owns and holds all the assets will drastically reduce your liability.

Furthermore, the holding company can loan cash to the operating company for operating capital and that will show up as a liability on the balance sheet of the operating company. If any lawsuits are pursued against the operating company, the plaintiff will see that there are no assets within the operating company and it’s a futile effort.

Another strategy is ensuring you have a proper amount of liability insurance in force within your operating company. However, this won’t stop anyone from trying to sue above and beyond what your current insurance is in force for.

However, careful care must be taken to ensure no ‘passive’ assets are held within your holding company or operating company as you will lose access to your Capital Gains Exemption (Discussed here)

The second point is a little bit more complicated and requires some careful planning.

In Alberta we have what’s known as the “Fraudulent Conveyance Act”. It is called something different from province to province but essentially it provides creditors with a mechanism to attach assets from holding companies or other associated companies to the operating company in the event of insolvency.

There are some strategies that can mitigate these concerns using offshore planning, however, it is outside the scope of this post.

I will encourage you to schedule a free 30-minute strategy session with me.

What this session will highlight is:

  1. If you have unforeseen liabilities threatening your future
  2. How you can be more efficient with your finances and save on taxes
  3. How you can receive maximum after-tax value from your company if/when you sell
  4. How you can pass down your business to your family without sacrificing your goals
  5. If your planning has something missing from it

So please schedule a session and I look forward to exploring how we can help you.

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