[This week's entry discusses the laws of the Province of Ontario. For readers in other jurisdictions, please consult with a local lawyer]
This week we touch on an entirely different area for small business owners. Many of my clients are small business owners, either as a part time or full time endeavor. We have all heard about bank loans and collateral for the loans. If a bank takes collateral for a loan, what this means is that in the event that you do not pay your loan obligations as they become due, the bank has the right to seize and sell that collateral to pay itself back for the unpaid portion of the loan.
When small business owners first start their business and they incorporate a company to carry on that business, frequently they put their own personal funds into the company to allow it to operate. This can happen at any time. If you are a shareholder in your own company and the advance is documented properly, these advances then become loans owed by your company to you as a shareholder or shareholder loans.
Unfortunately, if a business starts to fail, often the owner of the business or shareholder, wants to take out money to repay themselves for past shareholder advances. If this occurs at a time when the business has creditors which aren't being paid, legislation in Ontario may apply and give rise to an action by a creditor to have those moneys repaid back to the company by you.
When you put money into your company you should do so on the basis that the advances are loans and you should make those loans secured loans, meaning, there is collateral for the loan to ensure that the loan is paid back to you. At the inception of your business or as soon as possible, you should enter into an agreement with your company to give you a lien against the assets of the company. This lien must be registered against the company. In Ontario, the legislation governing the granting of security in personal property is called the Personal Property Security Act. Ideally, this arrangement should be in place before you ever advance money to your company.
If completed properly, securing your personal loans to your company is a legitimate and legal method to secure your investment which will rank your investment ahead of the company’s unsecured creditors if the business gets into difficulty.
For more information on how to secure your shareholder advances to your company, please feel free to contact me.