This pandemic has been tough on many businesses. The economic shutdown has left many businesses struggling to stay afloat. Some of them may not make it. Chris Gandhu, a High Net Worth planner with TD Wealth, joins Kim Parlee to talk about protecting your personal assets if your business fails.
- The pandemic has been tough on everyone, and it has been especially hard on businesses and business owners. The economic shutdown and market downturns have meant that many businesses are struggling to stay afloat. It stands to reason, then, that sadly many may not make it. Chris Gandhu is a High Net Worth Planner with TD Wealth. He joins us from Calgary with this Ask MoneyTalk. And Chris, our question is, if my business fails, how can I protect my personal assets?
- Right. Kim, I think the seminal question is, how is your business structured to begin with? So many Canadians may have opted to simply run their business as a sole proprietor because it's easy and cost-effective way to run the business. But if that's the case, then you have to understand that your business and personal assets are one and the same.
If you chose to use an entity, maybe such as a limited liability partnership or a corporation, well, those entities then provide that liability protection and there's a separation between personal assets and business assets, in which case, creditor protection is easier to achieve for your personal money.
- Let's say that-- I know it costs more money, as you mentioned, to become incorporated. But for all the reasons you just mentioned is a good idea, let's say that I am incorporated. Is there anything more I can do?
- Sure. So once you're incorporated, it means, of course, your personal assets may be saved from your creditors. But your company's assets certainly aren't. So I think now you take the next step and you look at your corporate balance sheet and think about which assets need to remain in a company. So retained earnings are always a significant part of a company's assets.
And I think I would encourage you to consider, well, do these retained earnings need to stay in this operating entity or should I consider extracting these monies, either personally or perhaps to a holding company? Because if the operating company does get into creditor trouble, then these assets that have been already extracted are absolutely safe and aren't caught. In fact, if the company needs the money to reinvest, it might also be a better option to still close it out and lend that money back, basically sort of switching your equity interest into debt interest.
- If I decide that I don't want to do that and for other reasons, let's say, I decide that I don't want to incorporate, are there any other protections that people should think about?
- Yeah, there are other options. In fact, whether you choose to incorporate or not, these options are available to you. So maybe the biggest one out there is use of trusts. So Kim, if I am a creditor after your assets, clearly I cannot attach my claim to those assets that are no longer yours. So imagine, you could gift your assets before a claim arose.
A lot of times, individuals want to do that, but perhaps the recipients, the beneficiaries, aren't ready. Each could be a big factor. They're just too young to receive this money or this asset. Well, a trust accomplishes this by sort of being an intermediary. I can gift my assets to a trust, but those assets don't belong to the beneficiary yet. They're held inside the trust on certain conditions, and the beneficiaries will receive them perhaps once they become a certain age. So it's sort of like having your cake and eating it too.
And in addition to the use of trusts, I would also encourage you to consider-- based on your jurisdiction and the local laws, of course-- sometimes RRSPs and life insurance solutions can also provide creditor protection. So do look at that as your overall plan. And finally, one concluding comment-- creditor protection works if you're proactive. It is too late to do this if there is already a creditor in the picture. So consider it as planning to be done ahead of time.
- All right, good impetus for someone to start talking to somebody right away. Chris, always a pleasure. Thanks so much.
- Thank you, Kim.
- That's Chris Gandhu. And if you have a question you'd like to ask MoneyTalk, send an email to MoneyTalk@td.com with the subject line "Ask MoneyTalk," and then ask your question, and we'll find the right person to help you get that question answered. You can check back on MoneyTalkGo.com where you can find answers to so many questions about life and money.