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Protecting Your Business Assets

It takes a long time and hard work to build up assets these days.  Whether you are starting out on your own, are a business owner, or have built up personal assets over the years, astute legal advice will help you protect what you own from unforeseen liability claims and creditors.

A business owner or any individual has the right to structure their affairs in a manner that reduces risk as long as there is not a specific goal to defeat claims that would prejudice others.  Transactions or structural changes done on the "eve of bankruptcy" may be challenged by a disgruntled creditor and may be reversed or clawed back.  As a result of this, the time to structure your affairs to protect your assets is when the risk of threat is low and times are good.

The clearest option to limit risk for self employed and business owners rests in the underlying structure of the business.  A sole proprietorship is perhaps the riskiest structure in that the owner is personably liable for all actions of the business including debts, lawsuits, and other unforeseen claims.  The greatest structural protection comes from a limited liability corporation.  In this structure the owner is generally only at risk for the assets in the company.

Business owners should also protect their investment inside the corporation.  Often as equity builds, it may take the form of a shareholder loan.  The balance of the shareholder loan should be protected through a General Security Agreement.  This agreement would be registered at the Personal Property Registry and have the effect of giving the shareholder priority in the repayment of the shareholder loan over other creditors.  The shareholder becomes a secured creditor.

Although a business may have a corporate structure and implement General Security Agreements to protect business risk from shareholdings, individuals still have houses, cars, RRSP's, and other assets outside the business that may be at risk.

In the protection of these business as well as individual assets, insurance is often used to create a buffer between claims and the assets.  These policies often involve home and auto insurance but can also include extensions for other liability.  Insurance protects against unforeseen lawsuits up to a specified amount in the insurance policy.  If a lawsuit larger than the insurance policy were successful or the claim is not covered by the insurance policy, then the plaintiff would be required to satisfy their claim with the personal car, bank account, or even home of the unsuccessful defendant. 

RRSP's and other retirement funds may also be protected with careful planning.  Self employed, business owners, independent contractors including anyone with personal RRSP's may have their retirement funds at risk of creditors.  Recent court cases in Ontario have moved closer to providing protection of these important assets from creditors, however a clearer and more acceptable way to protect these savings is to place them in a Segregated Fund.  Segregated Funds are an insurance product with a designated beneficiary.  The courts have determined that these may not be seized in the event of bankruptcy or other financial difficulty.

Of course there are many other strategies and legal tools to help a person reduce their exposure to risk.  Advanced planning should also involve estate and tax matters.  By working closely with your lawyer and other advisors you can be assured that your risk is limited.

By Jeff Carlson
August 18, 2004