How can you lay legal and financial groundwork to protect your personal assets?
Running a business exposes you to potential legal claims from
partners, employees and suppliers. If your company faces financial
trouble, your personal assets could be at risk. Here are some ways to
protect them:
- Incorporate to limit personal liability: Creating a separate legal entity can protect your personal assets from your business challenges, such as debts or lawsuits.
→ Is a holding company the right option for you? Find out here.
- Separate your personal and business finances: By having discrete accounts, credit, and records, you’ll have a more accurate picture of both financial situations and be better able to protect your personal savings and assets if your business is in trouble.
- Set governance basics: Shareholder agreements create a legal structure for the business that protects personal wealth from business debts and lawsuits. Partnership agreements, however, dictate that partners’ personal assets won’t be protected should the business encounter difficulties.
- Family trusts: Setting up a family trust – after the sale of your business, for example – to hold and invest the proceeds is one way to protect your wealth.
Good to know: Trusts can be complex and have implications for both tax and estate planning. It’s important to work with legal, tax, and wealth advisors to build a strategy that best fits your situation.
How can you maximize tax efficiency as a defence strategy?
While taxes are unavoidable, smart planning can help reduce the burden they impose. Here are a few effective tax management strategies that can help build and protect your personal wealth:
- Income splitting: If you run a family business, you may be able to split income with family members who actively work at the company. This can be especially useful when preparing for succession and integrating younger generations.
- Expense tracking: Keep detailed records of business-related expenses such as travel and home office use. A yearly line-by-line review of your revenue and expense statements with your accountant can help maximize legitimate deductions.
- Individual pension plans (IPPs): Contributions made by your incorporated business to an IPP are tax-deductible and can help build retirement savings in a tax-efficient way.
- Holding companies and retained earnings: Using these can be beneficial from a taxation point of view while also mitigating risk to your personal wealth.
→ Find more tax planning tips for small business owners in this article.
What’s involved in estate and legacy planning for business owners?
- Core documents: It’s crucial to clarify your plans ahead of time. This could mean preparing documents such as wills, protection mandates, representation agreements and powers of attorney, or appointing key people such as beneficiaries and executors.
- Philanthropy strategies: Make sure any foundations or donor-advised funds align with your tax planning.
- Strategic lifetime gifting to family members: If you intend to gift money or assets to loved ones during your life, be aware of the potential impact on your finances.
How can having the right advisory bench help you?
Finding the appropriate people to advise you depends on your business’s needs and objectives. When it comes to protecting your personal wealth, here are some things to consider:
- Diversity of expertise: You’ll want a wealth advisor, tax accountant, and corporate lawyer to support you in your decision-making.
- Hands-on support: Your business will face time-sensitive transactions – mergers and acquisitions, refinances, restructures – that will require advisors who are available and qualified to help you make the necessary decisions quickly.
Why is it important to diversify your income beyond the business?
For many owners, their business is their only source of income. This can affect your long-term financial health because if the business suffers, so does your personal wealth. That’s why owners should think about ways to improve cash flow within the business while diversifying sources of income outside the business. Start by finding ways to reduce the time you spend on day-to-day operations so you can explore other income streams, such as:
- Real estate investments, which can provide passive income.
- Licencing intellectual property, such as a unique product or process, which can generate royalties.
- Turning your expertise into revenue by consulting or taking on speaking engagements in your industry.
How can stepping back help your business grow?
Many business owners are so focused on operations that they don’t take the time to think about their personal financial health. Stepping back can help you see new opportunities to protect and even grow your wealth.
Planning ahead can make all the difference. Contact a financial advisor to explore ways to improve your business outcomes and protect your personal wealth.