Few words inspire more fear in entrepreneurs than this one: creditors. Do any of the following, and the people you owe could pick you clean.
1. Fail to incorporate
Corporations are legal entities distinct from their owners, meaning creditors usually can’t come after you for the debts of your corporation. If you haven’t done so already, spend a few grand and incorporate your firm — pronto.
2. Offer personal guarantees
Incorporation won’t protect your personal assets if you’ve offered business creditors — such as bankers and suppliers — personal guarantees.
3. Shrug off insurance
A life annuity that names a spouse, parent or child as beneficiary can build value that can’t be attacked by creditors, says Doug Brown, managing director at Newport Partners Inc., a wealth-management firm in Toronto. Also, purchasing directors-and-officers insurance will guard you against most circumstances in which you can be held personally liable for business debts, such as GST owed to Ottawa.
4. Keep money in the business
Removing superfluous wealth from the business means there’s less for creditors to claim. Consider sinking money into an RCA or family trust, transferring it to a holding company or moving it offshore.
5. Keep assets in your name
Creditors can’t touch personal assets you don’t legally own. Consider transferring title to company shares, your home, car, etc., to someone (e.g., your spouse) or something (e.g., a holding company), suggests Dan McDicken, a partner with Meyers Norris Penny LLP, an Edmonton-based accounting and business advisory firm.
6. Transfer assets at the last minute
“There are very strict laws that deny you the right to transfer title out of your name if the purpose is to defeat or hinder your creditors or potential creditors,” says Brown. Transfer early and often.
© 2004 Susanne Baillie