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Creditor-proofing your assets
More than ever, business owners are
concerned about finding inexpensive
ways to protect their assets. Business
risk has been impacted by increasing
claims and regulations as well as the
lack of tort reform. So what can you do?
You can achieve some protection
through the way you structure your
business, by changing who owns what.
The primary objective of creditorproofing
is to use limited liability and
ownership structure to protect the
assets. A good creditor-proofing plan
encompasses tax and financial planning,
and takes account of personal holdings
as well as those of the business.
Creditor-proofing is not a substitute for
insurance; in fact, the extent of
coverage and insurance options should
be considered as part of the plan.
Ironically, a creditor-proofing plan is
most effective if it is done at a time
when there are few assets and no
claims outstanding. By the time a claim
occurs, it is too late to move assets
beyond the reach of creditors. Creditorproofing
is best undertaken at the start
of a business venture.
Ideas for protecting your assets
- Consider establishing your business as a corporation or limited partnership rather than as a proprietorship or partnership. A corporation’s obligations are limited to its assets so this structure can provide protection for your personal assets.
- Invest by way of registered secured debt and minimize your investment in share capital. Have your lawyer register your security, providing a charge, or secured claim, against all the assets of the business.
- Hold assets such as real estate and equipment in a leasing company that is a sister or parent company of the operating entity.
- Carry on operations in a subsidiary of a holding company.
- Distribute accumulated earnings to the holding company by way of tax-free intercorporate dividends. If required, funds can be loaned back to the operating entity on a secured basis.
Ensure priority creditors (e.g., payroll
withholding, GST, PST) are paid on a
timely basis. Priority creditors can rank
ahead of other creditors in the event of
insolvency and in some circumstances
can become the personal responsibility
of directors.
Your Shareholders’ Agreement
should include provisions that restrict
the transfer of shares and that
require the disposition of shares to
other shareholders on insolvency of
a shareholder.
Creditor-proofing undertaken after
the business starts to mature will be
more open to challenge than creditorproofing
completed at the beginning
of a business venture. The risk of
challenge is reduced to some
extent if the strategies are part of a
plan implemented for some other
business purpose. A good example
is an estate plan in which the creditorproofing
element is an important
additional benefit.
Protecting personal assets
An additional objective of creditorproofing
is to protect personal assets
from risks that may arise from
association with the business.
An Asset Protection Trust can be a
flexible tool for isolating non-business
assets from such risks. Assets
transferred to an Asset Protection Trust
do not form part of the transferor’s
bankruptcy estate and are not subject
to claims of creditors. Such trusts are
generally irrevocable for a period of
time, such as ten years.
On completion of the ten-year period,
the trustees have the option of
returning the assets to the transferor
or extending the irrevocable period if
the transferor has known creditors.
It should be noted that the objective of
the trust is to protect assets and not
to split income for tax purposes.
Income earned by the trust will be
attributed back to the transferor.
The benefits to be achieved by a
creditor-proofing plan should not be
considered in isolation but in relation to
the other aspects of the Business Plan
and the personal financial plan, including
family law implications. Implementing
creditor-proofing can yield big benefits in
protecting the assets that you worked
so hard to attain.
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