4/12/2006
Business Planning for Beginners

By TODD D. HOWELL, BSc, MHA, CIRP, Trustee in Bankruptcy

When starting a new business, the farthest thought from one’s mind is that the business may not be successful. Even though personal estate and tax planning are commonplace today, most people do not give enough thought to their own business planning.

With more and more individuals becoming self-employed or starting their own businesses, it is crucial that they spend the time when beginning a new business venture to understand and plan for the pitfalls of a possible business failure.

This article looks at a few of the more important areas in planning for any new business of which owners should be aware, in order that personal liability for business debts is limited if the business fails.

Liability for Remittances to the Government

Directors of a corporation can be held personally liable if a business fails to remit amounts for employer/employee tax deductions, federal goods and services tax, provincial retail sales tax and employee health tax. Directors must ensure that remittances for these taxes are paid in full and on time. This should be the first priority of any business. Some businesses will skip a few payments because the rent or a key supplier must be paid, but this is a dangerous practice and one that can bring unwanted personal liability later. In addition, there are more than 150 federal and provincial laws that impose directors’ liabilities.

Leases

Most businesses must rent a location from which to operate. Some landlords require that the owners or principals of the business personally guarantee the lease. It is crucial, once a location has been chosen, and a lease is being negotiated with the landlord, that a solicitor and/or accountant be consulted to ensure the owners understand fully what the lease entails and what personal liability they may be exposed to if they personally guarantee the lease. A professional opinion or review prior to executing the lease can help avoid problems later.

Shareholder’s Loans

When a bank lends money to a business, the bank will usually ensure that its loan is secured against the assets of that business. When starting a business, most people will invest some of their own money in the business. These personal loans can also be secured against the assets of the business, just like the banks.

If there is a business failure later, the assets of the business are liquidated and paid to creditors based on statutory priority. If the personal loans to the business are secured, it allows the owner to recover the money in advance of the unsecured creditors. For a loan to be secured, proper loan documentation must be prepared and then registered pursuant to the Personal Property Security Act. This should be done by a solicitor. The banks protect their investments, so should you.

Allowable Business Investment Loss (ABIL)

If the business fails, and the loans are not repaid by the business, owners who have invested personal funds into the business may be able to claim these amounts as an allowable business investment loss (ABIL).

The Income Tax Act states that “if you disposed of a share or a debt owed to you by a ‘small business corporation’ either to a person with whom you deal at arm’s length or because the corporation has become formally bankrupt or effectively insolvent, and as a result you incurred a capital loss, you may deduct the allowable portion of this loss from your income for the year from any source.”

The rules governing which investments are eligible, and which are not, are complicated, and an accountant should be consulted in this regard. Even though you have lost your investment, you still may be able to claim some of the loss against your income for tax purposes, helping to make the loss a little less painful.

These are just a few of the areas that new business owners should be aware of when starting and investing in a new business. No one wants to plan for business failure when just starting out, but if you keep a few simple concepts in mind when starting your business, you can keep your personal liability to a minimum if things to do not work out down the road. Again, it is important to consult with your accountant and/or solicitor in planning for any new business to ensure that things are done properly at the beginning.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.