Protect What You Have Earned

If you follow hockey, you will notice that many injuries result from late hits.  Some might say dirty hits.  A player cannot risk being in a vulnerable position.  In simple terms, protect yourself because you cannot expect others to do it for you.

In that respect, hockey is not different from business.

Most people who own a successful business know how they made their money.  They did it by working when they would rather have been playing (in some cases sleeping), by doing without so the business could have more money to grow, by being highly stressed most of the time, and by taking risks that could have lost it all.

Once it has worked out, and for the vast majority of new businesses it does not, business people should want to keep what they have made. As hockey commentator, Don Cherry says, “You need to have your head on a swivel.”  That means you need to know what is going on around you and how it could affect you.

Like hockey, you need to protect yourself.

Unfortunately, many business people fail to take elementary steps that would help prevent the loss of their lifetime’s work.  Usually, because they are too busy looking after the business to notice these opportunities.

Business people want instant answers.  Here they are.

  1. Carry adequate insurance.  That includes fire, theft, public liability, auto, and personal disability.  Own life insurance to buy out partners, pay off loans or provide money to pay professional managers until the business sells.  No one ever dies when everything is completed.  Money solves half-finished problems.
  • Auto insurance can be problematic.  It would be good to know how much someone else can collect from you.  I know of two business owners whose children, while driving Dad’s car, were involved in accidents where the resulting claim substantially exceeded the policy limits.  Take the most coverage they will sell you and/or isolate ownership of vehicles.
  1. Carry “Director and Officers” liability insurance.  As a director or an officer of a business, you are personally responsible for a good many things you do not normally think about.  Things from which the corporate form of organization will not protect you.  Things like unremitted payroll deductions, sales tax payments, environmental degradation, workplace conditions including various forms of harassment, firing decisions, investment management of employee retirement plans and more.  Once you have the D&O insurance make sure you understand what it does not cover.  Many do not cover punitive damages.
  2. Be cautious serving on the boards of other businesses, charities or community organizations.  The same director liabilities that apply in your own business also apply in these.  Sometimes there is more risk.  For example, release of private information.
  3. Use a holding company.  Operating companies have commercial risk.  Take profits through operating companies to the holding company.  Do it every year, not just when there might be a problem brewing.
  4. Secure advances and loans to your business.  If you take money out of the operating business or the holding company, it never goes back in without full security.  You may need to postpone your security to the bank or other secured lenders, but you have protected yourself as well as possible in the circumstances.  Registered security, please.  In Ontario, a general security agreement registered under PPSA.  Losing money after you have earned it means that you need to make the same money twice to keep it once.  Work twice, keep once is not a good strategy.
  5. Creditor Proof Retirement.  Your retirement savings plans, should be immune to creditor claims.  To accomplish that, you will need to use a “segregated fund” or an Individual Pension Plan. (IPP)  IPP’s also offer the ability to contribute more money than you can put into a Registered Retirement Savings Plan.  The taking out is somewhat more restricted but in-family rollovers can be possible.
  6. Other creditor proof assets.  Investments outside your businesses can be creditor proof in some cases.  Segregated funds and life insurance cash values are generally not subject to claims of creditors if you have created them properly.  There are technical issues.  Talk to your adviser.

Most business people work 100,000 hours in their career.  Spending 10 of them to protect the results of the other 99,990 seems like time well spent.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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