LEGAL UPDATE   September, 1999
How to Protect Your Assets and Secure Your Investment
 
 

Protecting your assets

Debt v. equity investment in a small business

Use of corporation to create a debt relationship for your investment

Timing of when an investment can be made a debt

Why securing debt is important

How do you secure a debt investment

Alternatives to and variations on debt investment
 
 

1. Limit Your Exposure To Claims By Reducing Personal Assets You Own
 

transfer house to spouse

transfer saving accounts to spouse

transfer investment and vacation properties to spouse
 

2. Avoid Spouse Being Exposed To Personal Liability
 

(a) avoid personal guarantees

(b) be cautious in making a spouse a director, i.e., director liability for:

statutory liability

common law liability

inducing breach of contract

negligent misrepresentation

negligent mismanagement

breach of trust
 
 

1. Better To Invest As Debt Than Equity
 

2. Debt:
 

debt is investment by loans to business

business is obligated to repay loans before equity

investor is entitled to recover loans from assets of business

if insufficient assets then assets will be shared amongst investors

need two parties to create a debt
 

3. Equity:
 

equity is investment by contributions to ownership of business

business is not obligated to repay equity contribution

contribution is only recovered when all debt is repaid

if insufficient assets in the business then equity is lost

does not require two parties
 

4. If Business Fails, Better To Have Invested Debt Than Equity
 
 

1. Corporation Is A Separate Legal Entity
 

2. With A Corporation The Investor Can Choose To Either:
 

invest in business by contributing equity; or

invest in business by loaning monies to corporation
 

3. Better To Invest As Debt Than Equity
 

less assets in corporation for creditors to seize

allows you as investor the same remedies as other creditors
 
 

1. When Monies Are Needed To Start Business
 

2. When Monies Are Needed For Ongoing Operations
 
 
 

3. When Assets Are Transferred To The Corporation
 

4. When Financing Is Arranged By Owner Personally Borrowing Monies
 

5. When Financing Is Arranged By Owner Mortgaging Residence
 

6. When Owner Loans Profits Back To The Business
 
 

1. Without Security An Investor Is Only An Unsecured Creditor
 

2. An Unsecured Creditor Will Not Have Any Specific Assets To Seize
 

3. An Unsecured Creditor Will Have To Share Remaining Assets With Other Creditors
 

4. With A Secured Loan The Investor Will Have Assets That Can Be Seized
 

5. By Recording The Security There Will Be Written Evidence Of Debt
 
 

1. General Security Agreement
 

it is a mortgage against the chattels of the company

registered under the P.P.S.A.

subject to prior registrations

must renew registration
 

2. Real Property Mortgage
 

it is a mortgage against the lands and buildings of the company

registered on title

subject to existing mortgages

does not require renewal of registration
 
 

1. Instead Of Loaning Monies To Buy Assets, Assets Can Be Leased To The Company Through Management Company
 
 
 

2. Examples Of When This May Be Appropriate:
 

lands and buildings are retained by owner and leased to company

use two companies, one to own equipment and the other to lease it and use it for business operations
 

3. A Variation Is To Form A Holding Company And Transfer Retained Earnings To It For Protection Without Tax
 
 
 
 
 
 
 

DISCLAIMER: This summary of How to Protect Your Assets and Secure Your Investments is distributed with the understanding that it does not constitute legal advice or establishing the solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision making without first consulting with a lawyer and obtaining a written opinion concerning the specifics of your particular situation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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