Bob Gauvreau explains how incorporating a business limits an individual owner’s personal liability by separating corporate assets from personal assets. He describes moving surplus funds out of an operating company into a holding company or, preferably, into a family trust to add another layer of protection and tax advantages (income splitting, multiplying capital gains exemptions). He notes transfers can be done on a tax-free basis in some structures and warns about limitations when selling if assets remain in HoldCo.
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Bob Gauvreau.
August 27, 2024.
About a quarter-million dollars per beneficiary (depends on circumstances).
Chapters
One of my favorite topics to talk about is how we protect assets for an individual business owner. So an incorporation can substantially protect you when it's set up properly. So there's a few elements that we want to consider. So first and foremost, by setting up a corporation and having the activities of a business run through a corporation, it limits the liability and exposure of the individual shareholder who owns the company. So for example, if you're a sole proprietor, you're running a trucking company and something bad happens in the trucking company and there's maybe an accident, people can go after all of your personal assets because you are owning the company all by yourself or thinking of it as a gas station. If there was a gas spill, any of the environmental liability could be going to you personally. Whereas a corporation, if that corporation is a trucking company, it's got a truck in there that's operating everything in a gas station. You've got maybe the, the land and building that's in there. If something were to happen or an accident were to happen and you were to get sued, the only assets that they can really go after are the entities assets that corporations assets. So the truck and potentially the land, building. But they can't go after your home as a sole proprietor, people can go after your home because really you're the one who's responsible for that. So that's an extra level of liability protection that a corporation has. Now I want to take this to the next level because there's more sophisticated ways to continue to enhance the protection of an individual with a corporation. So let's say that same trucking company is inside a corporation and it starts to be very financially successful. So what happens is if the company is left in the company, if the money is left in the company, we continue to accumulate assets inside that company. And you would say, well, Bob, now we've got all these assets in the company, it doesn't even matter if they sue me or the company, all my assets are in there. Okay, There's a way to protect those assets. So we can then look at implementing a structure for that corporation which allows you to pull funds out of that operating company, out of that trucking company and get them into a holding company. My personal preference would be to introduce a family trust at that point, which allows for a bunch of income splitting opportunities. Multiplication of the capital gains exemption, which could save quarter million dollars per beneficiary in a family trust. And I say could, depending on the circumstances. But what it would do is it would allow us to transfer money out of an operating company on a tax free basis and out of that company into a holding company that could be a corporate beneficiary of the trust, or that corporation could own the operating company. So HoldCo, OpCo, it's not as effective as using the trust, but it also will work. There's some limitations. If you want to sell down the road and you've got all your assets in Holdco, you're likely not going to get your capital gains exemption. A family trust would work more effectively, but by doing this, regardless of how you do it, moving the cash out of the operating company into that holding company would protect any of the assets that the company has earned and generated from any sort of liability or loss as well. So the first part is incorporate to limit the liability of you personally and then look at how we can introduce multiple corporations or maybe even a family trust to protect all of the accumulated assets that the company has and and create a further layer of liability protection. So if it's done right, the use of a corporation or a more sophisticated structure can not only protect you, but it can protect the company and all of the surplus funds that the company generates along its journey.
