When personal and corporate wealth mingle
Self-employed workers are extremely vulnerable
For Luigi, it's now or never. For years, he has postponed his dream of owning his own business and focused instead on the needs of his family. There was the house they wanted to buy, the trip to Italy, the children's private school education. But now, at the age of 45, the time has come. He will convince his wife to remortgage their house and combine her RRSP with his as a guarantee— the bank will not lend him money otherwise—so that he can start his own excavation company.
Hold on a minute!
This aspiring entrepreneur, like so many self-employed people and those who own a small or medium-sized business, is about to confuse his personal with his corporate wealth. A substantial proportion of business people and selfemployed professionals have trouble drawing the line between company assets, on the one hand, and personal assets that become part of the family's wealth, on the other.
These people are highly vulnerable to financial difficulties, accident, illness and lawsuits involving professional liability. When the loss of one of the company's major clients results in significant personal consequences, or the divorce of the president affects his associates, there are serious questions to be answered.
Why risk squandering, in only a few hours or days, money that has been acquired through hardship and personal sacrifice over almost an entire lifetime?
Keep your personal and professional assets far apart
There are obviously several ways to protect your wealth and take steps to keep personal and corporate assets separate.
A notary's first recommendation would be to establish a wealth inventory. This list has two objectives: it serves as a reference when planning the will and succession of the entrepreneur and guides the next of kin in the event of incapacity or death. At work, the transition can be made quickly and everyone will benefit from greater clarity.
More than just a collection of information, the inventory serves as the basis for in-depth discussion on the sort of protection the company has at its disposal for surviving a major crisis. For example, notaries and their clients may examine corporate liability insurance coverage. They will also determine if the entrepreneur's personal wealth is safe in terms of the company's professional activities.
Once the wealth inventory has been established, notaries will suggest two other key wealth protection measures: the preparation of a will and a mandate in case of incapacity.
The will is still by far the most structured manner of passing on your wealth and your business. The notary's advice is extremely useful in determining the method to use for distributing assets while at the same time, if possible, reducing taxes to be paid upon death. The notary can also help a client choose the most appropriate person to act as liquidator.
As it is difficult for self- employed workers to draw the line between company assets and personal assets, they can be extremely vulnerable in certain situations.
The mandate in case of incapacity is a basic precaution for entrepreneurs who do not want to leave their company at the mercy of events. This legal document outlines solutions should their health deteriorate. Through the mandate, they can designate a person close to them to take care of them and another person who knows the business well enough to be responsible for managing it as well as their personal assets.
The techniques for protecting against unforeseen problems that can arise in a the normal course of business have been greatly refined in recent decades. We all remember the days when the ownership of some assets—especially the family home—was commonly transferred to the surviving spouse. Today, such strategies take different forms. For example, the creation of a protective trust for assets is a new type of instrument that notaries now use to protect the wealth of Quebeckers.
Notaries also make sure the company survives
“My company will die with me.”
This comment, which you may have heard at a family dinner over the holidays, reflects a sad reality: numerous small businesses are threatened in the medium term unless there is someone to take the founder's place. We even hear of this happening in highly successful companies.
Notaries can offer active assistance in the handing over of the reins of a company, as this involves the protection of wealth accumulated over the years. In fact, this is one of their core professional activities.
Among the solutions, notaries can guide the founder's family members or key employees in taking the steps necessary to manage the succession, such as buying insurance policies on the entrepreneur's life, which will eventually allow potential successors to buy the business after its founder's death.
Notaries can also help minimize the tax impact of the transfer of company ownership. Various strategies, such as estate freezing, can maximize preservation of entrepreneurs' wealth.
Notaries can therefore be proactive well before the occurrence of unfortunate events (death, dissolution or transfer of the company, etc.) in the life of a self-employed worker or entrepreneur.