There’s much more to setting up a small business than meets the eye. From permits to laws that govern employees, to making sure the company’s accounts are in order, to acquiring new shares and assets, to ensuring a secure succession and estate plan are in place, legal liabilities loom at every stage. Businesses are often started on a shoestring budget without giving much thought to the legalities involved, resulting in 30% of Canadian small businesses having to deal with a legal dispute in the last three years, according to a recent survey commissioned by the Canadian Bar Association.
Ownership structure: Setting up the business structure properly is one of the first questions entrepreneurs face when setting up shop. Selecting the wrong ownership structure can expose them to unlimited personal liability for their company’s debts. For this very reason, the first thing that should be reviewed is the corporate structure. Who owns what? Are there any trusts? Are there any shareholders? Are all the required documents in place? If there are partners, do they have a either a buy/sell agreement or universal shareholder’s agreement (USA) in place, and is it funded with life insurance. Did a lawyer draft the documents or generic ones used?
Structural opportunities: The next step is to decipher any change opportunities, given how the business is currently structured. That may involve estate freezes, reorganization to introduce a holding company or trust, or setting up new classes of shares for different shareholders. Take a family farm operating an oilfield service business from the farm; if the business assets are intermingled between them, there may be exposure to cross liability from creditors in the event of lawsuits with either business.
Should we incorporate? One of the conundrums prospective business owners face is whether or not to incorporate. From a tax planning standpoint, it should be delayed until there is enough earnings to justify it. Once they start to become profitable and build retained earnings it may make sense to do so. Not incorporating can potentially expose their personal assets to legal action, depending on the business they’re in. To safeguard against that, it’s important to understand what the company is, what it does, but most importantly, what the risks are. Then issues such as adequate insurance should be addressed. If there’s none in place, a financial advisor can suggest the right type of insurance for that business.
It’s important to make sure things are structured in a way that personal assets aren’t exposed to jeopardy. For example, one of the things to recommend, especially for owners operating high-risk businesses, is to ensure any owner/employee pension plans are creditor protected. Small businesses are exposed to a multitude of risks, and as they grow so does the risk potential.
If your business has not had a financial risk review recently it may make sense to conduct one to determine what risks exist, then decide what steps are needed to mitigate them in a cost effective manner. Find a trusted financial professional to do a review of your farm or business and identify any potential holes in your risk management program. As the saying goes, it’s better to be safe than sorry!
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