Are you the owner or shareholder of an incorporated small business venture?
If so, you should understand that a corporate entity (“Your Company”) is a separate legal entity - effectively, another person.
The Issue: Have you loaned money to Your Company?
When starting a small business, the owner is often the primary source of working capital. It is not unusual to find that, as a small business owner, you are also the single largest creditor of Your Company.
If Your Company were to seek a loan from a bank or other third-party lender, that lender would almost certainly require security for their loan. In these scenarios, they would typically obtain a General Security Agreement (“GSA”) from Your Company that they would register in the British Columbia Personal Property Security Registry.
More often than not, we encounter small business owners who have loaned money to their company but have not registered security for their loan. As a result, in the event of insolvency, these small business owners are relegated to unsecured creditor status, which means they do not have priority in recovering their loan.
It’s important you protect your assets, especially when you are investing in Your Company!
When making a loan to Your Company, you should obtain a GSA and register your secured interest in the Personal Property Security Registry, just as a third-party lender would. Then, in the event Your Company encounters financial difficulty, you may have some additional options available that you otherwise wouldn’t. These options include, but are not necessarily limited to, seeking the appointment of a receiver (and recouping funds ahead of the unsecured creditors) or possibly agreeing to subordinate your loan (or a portion thereof) to entice acceptance of a proposal to creditors in a formal restructuring process in order to avoid a bankruptcy or liquidation.
Generally speaking, the best time to take security is concurrent with the advance of funds to Your Company. Taking security after the fact can be problematic – especially once there are potential insolvency issues. In this regard, it’s kind of like borrowing money from the bank, the best time to borrow is when you don’t need it. So, in the case of Your Company, the best time to take security is when you don’t think you’ll need it.
Key Takeaway: If you have loaned money to Your Company, you should consider obtaining a GSA and registering your secured interest in the Personal Property Security Registry.
If you would like to discuss your specific situation related to the information above, we encourage you to contact a trusted Crowe MacKay financial advisor.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.