ASSET PROTECTION via INCORPORATION
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Using corporations for asset protection is a common and effective strategy, but it requires careful structuring and adherence to legal formalities. Those corporate tax strategies must be specifically tailored to the particular facts and circumstances, as the effectiveness of any plan depends heavily on proper implementation and compliance with applicable law.
A. Incorporation for Limited Liability
The first and most basic step is incorporating your operating business.
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Separate Legal Entity: A corporation is a separate legal entity from its owners (shareholders). This means that, in most cases, the personal assets of the shareholders (like their home, personal bank accounts, and investments held personally) are protected from the business's liabilities, debts, or lawsuits.
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The "Corporate Veil": This separation is often referred to as the corporate veil. To ensure this protection remains intact, the individual corporate stakeholders must diligently follow all corporate formalities.
B. Using a Holding Company Structure (Holdco/Opco)
This is the most common advanced corporate asset protection strategy for businesses with accumulated wealth.
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Operating Company (Opco): This is the company that actively runs the business, generates sales, and is exposed to operational liabilities (e.g., contracts, lawsuits, debt).
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Holding Company (Holdco): This is a separate corporation that owns the shares of the Opco and holds the business's valuable, passive assets. Asset Transfer: Excess cash and passive investments (like real estate, stocks, bonds) are periodically transferred from the Opco to the Holdco, typically through tax-free intercorporate dividends.
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The Protection: If the Opco gets sued or runs into financial trouble, the assets stored in the Holdco are shielded from the Opco's creditors, as they are legally owned by a different, separate corporation.
C. Maintaining the "Corporate Veil"
Incorporation alone is not enough; a court can "pierce the corporate veil" and hold shareholders personally liable if the company is not treated as a separate entity. Essential governance includes:
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Separation of Finances: Maintain completely separate bank accounts and credit cards for the corporation and for your personal use. Never commingle business and personal funds.
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Formal Records: Keep detailed, accurate, and up-to-date corporate records, including meeting minutes, resolutions, and shareholder registers.
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Contracts in Corporate Name: All business contracts, leases, and agreements must be made in the corporation's name, not your personal name.
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Adequate Capitalization: The company must be adequately funded to operate its business from the beginning.
D. Family Trusts
A family trust can work in conjunction with your corporate structure to provide greater flexibility and asset protection:
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Shareholder Role: A Family Trust can be set up to own the shares of your Holdco or Opco.
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Creditor Protection: Assets legally owned by a properly established, irrevocable trust are generally protected from the personal creditors of the individual who settled the trust and, often, the beneficiaries.
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Tax Benefits: Trusts are also used for tax planning, such as income splitting with family members (subject to Tax on Split Income rules) and utilizing the Lifetime Capital Gains Exemption (LCGE).
Important Legal Considerations
Asset protection must be done correctly and with a legitimate business purpose; strategies that are purely intended to defraud existing creditors may be deemed ineffective or illegal. Key risks to be aware of include:
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Fraudulent Conveyances: Transferring assets out of a business just before it faces financial difficulty may be challenged by a creditor under provincial legislation (e.g., Fraudulent Conveyances Act).
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Personal Guarantees: Limited liability is often bypassed when business owners are required to provide a personal guarantee on a business loan, lease, or credit line. In this case, your personal assets are at risk for that specific debt.
Given the complexity and the significant legal and tax implications, your next step should be to consult with an experienced corporate tax lawyer and tax accountant to design a compliant and effective corporate structure for your needs.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact our law firm to schedule a confidential consultation with a lawyer experienced in the legal intricacies of business incorporation and commercial business development at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
