Why Ownership Selection is Important
Any form of investment bears a level of risk. Risk, I learned back from working for an auditing firm, is any uncertainty that will have impact (positive or negative) to your business. Sometimes, risk manifests itself in a way that causes personal liability. When real estate transactions involving such a high volume of cash changing hands, you as an investor and party to that transaction want to tread very carefully. It just so happens that in the real world, the higher the dollar value of an investment, the greater the chance you can have claims made against you.
To start, written agreements can help you circumvent most of the foreseeable claims, and of course, having a capable real estate agent can help you with this when writing a Contract of Purchase and Sale. More importantly, your choice of ownership structure is also important. There is a handful of strategies I will introduce here to help reduce your personal exposure to claims that could easily eat into your profit margin, Return on Investment, and Rate of Return.
Corporations, undoubtedly, can help protect you from these claims in an increasingly litigious environment. A corporation, as a separate legal entity controlled by but independent of it’s individual shareholders, acts on its own legal behalf and bears responsibility for its actions.
Seek a lawyer for this part:
Taking advantage of the protection that personal liability corporations offer is easy. For example, always sign business documents as an authorized signatory of the corporation of which you’re a part. A clear statement that are you acting as a representative of the corporation rather than in your own personal capacity will help ensure the corporation, and not you, bears the brunt of any claims.
Similarly, if you make loans to your corporation, become a secured creditor. The corporation’s director may bear some liability. Be cognizant that if you’re a director of your corporation, you are liable for:
- Corporate tax
- Sales taxes
- Provincial employment standards legislation
- Builder’s liens
To protect yourself as a director of a corporation, consider not owning personal assets such as cars or real estate. You can transfer these assets to your spouse to limit what claimants can seek from you.
To minimize your risk, one strategy is to lessen your involvement in your business as a director. Another strategy is to reduce the number of possessions you hold in your personal name, such as property.
All these strategies you will require advance customized legal and tax advice. As always, seek the right professionals first and build a strong relationship with them at the onset so you will have your interests protected. My job as your realtor is protect your real estate related interests so you can reach your financial objectives with comfort, confidence, and clarity.