How small businesses can protect assets
Monday, March 19, 2001
Three of four Canadian small businesses have not taken adequate steps to protect their personal assets from creditors in case of financial problems, according to a recent survey by Toronto-based Mackenzie Financial Corp.
The survey of 301 small-business owners covers such industries as consulting, farming, fishing, business services, construction, renovation, catering, retail, manufacturing and transportation, among others.
The survey notes than only 1 per cent of business owners have invested in segregated funds, an insurance product that offers similar growth to mutual funds as well as potential protection of personal assets from market volatility and creditors.
Conversely, 63 per cent of survey respondents, mostly owners of older and larger businesses, hold mutual funds.
The small-business owners surveyed say they use other means to protect personal assets from creditors in the event of a business failure.
Twenty per cent have become incorporated, 2 per cent have transferred family assets into a spouse's name and 22 per cent have purchased business-liability insurance, although that may not actually protect personal property in the event of a business failure.
The survey also notes that many small and medium-sized businesses risk their assets by using them as collateral. Around 31 per cent of businesses have used a personal guarantee to secure a business loan, 27 per cent have used their house, cottage or car, and 12 per cent have used RRSP savings. Another 34 per cent have relied on bank loans, 16 per cent have used a credit card for money and 7 per cent have acquired a personal loan from family or friends.
"Small-business owners in Canada may be putting their financial future in jeopardy," says Mark Tiffin, executive vice-president at Mackenzie Financial. "By forgoing personal financial protection, business owners put their investments, personal possessions and even their retirement plans at risk."
The survey reveals that small-business owners also seem largely unaware of the financial tools available to reduce personal risks when financing their business. Although only 1 per cent report buying segregated funds to provide potential protection of personal assets against business creditors, 7 per cent say they have invested in them for other reasons, not knowing about the funds' protective features. Two-thirds said they had not even heard of segregated funds.
The survey shows that only one in five small-business owners say they would invest in segregated funds this year, unless they knew more about them.
The bottom line on segregated funds is that they guarantee 75 to 100 per cent of their investment upon maturity, are excluded from probate of wills and avoid the associated administration fees (resulting in significant benefit to heirs), and can be beneficial to business owners or senior executives with high exposure to personal liability.