When you start your business, you likely apply for a loan; the Bank makes you sign a General Security Agreement, pledging the assets of your business (and likely personal assets) to cover the loan in case something goes wrong.
In other words, the bank is a secured creditor.
The Canada Revenue Agency holds Directors of a Corporation and owners of Sole-Proprietorships accountable for ‘Trust Funds’ – GST/HST and Payroll Taxes. Therefore, CRA is also secured.
Often if you lease equipment or finance equipment through a bank or other third party, they too will likely require a General Security Agreement to protect their interests.
But what about the money you personally invested in your business?
Let’s assume you invested in a Restaurant Franchise and you had to put up $100,000 of your own money to get the bank to approve the financing (this is very common).
If something happens and the business goes bankrupt, where does your $100,000 go?
Well, if the debt is not secured, you will likely lose it all!
When a business files for insolvency (Bankruptcy), here is how it works:
The CRA has first priority to all of the assets of the business in respect of satisfying any trust funds outstanding (GST/HST and Payroll Taxes), then comes the other secured creditors, the Banks and other Lending insitutitions.
Once all of them have been paid, comes the ‘unsecured’ creditors, essentially, your trade payables (suppliers); and this is where your $100,000 investment sits.
IF, after CRA and the other secured creditors have been paid by the liquidation of your business assets, you and the rest of the unsecured creditors will share whatever is remaining – likely nothing!
So, how can you protect your investment?
Easy! Make yourself a Secured Creditor.
How? Simple. Setup a General Security Agreement between your business and yourself for the amount of money you have invested in the business.
General Security Agreements are a Legal Document and when prepared and filed properly, it will secure your investment and place you ahead of the unsecured creditors.
So, by doing this, you are changing the way the debts will be paid if the business becomes insolvent to the following:
1. CRA Trust Funds
2. YOU and the Other Secured Creditors
3. Unsecured Creditors
Here is something else for you to consider:
In this day and age, it is difficult for young couples to purchase a home without a little assistance from ‘Mom & Dad’; if you are going to ‘Gift’ a down-payment to your children to purchase a home, make sure you secure your gift.
Similar to your investment in your business, you could see the downpayment completely disappear in the event of financial crisis.
So what do you do?
Simple! Register a mortgage (with no terms of repayment) against the property your children purchase. The mortgage should have a value of the amount you have invested.
If something to were ever to happen (bankruptcy / foreclosure etc.) your original ‘Gift’ would be secured and you would likely receive all or at least some of your money back.
It may sound a little hard to swallow, but this is your hardearned money, protect it.
Need more information?