Secure your Shareholders Loan

Joel Lazer, FCPA, FCA, CIRPBlog, Consulting, Finance, Tax

Most business owners have significant investments in their companies. Often these investments are represented by shareholders loans. These loans often arose at start up or are the result of undrawn salaries and dividends allocated to the owners over the years. Sometimes these loans accumulate because of the cash requirements of the company; other times they result just because of convenience.

I believe financial misfortune could strike any company, often through no fault of the owner. It could result from accidents, fire, technology, lawsuits or a general turnaround in the economy. Without any special arrangement shareholders loans, in the event of financial misfortune, will be treated, at best, as unsecured creditors. In other words the shareholders will share in the company’s assets on a pro rata basis with the company’s suppliers. Banks, on the other hand, normally rank ahead of suppliers as they will insist on security for their loans. Shareholders could, like the banks, also secure their loans. The process is simple and relatively inexpensive compared to the assurance it provides to shareholders and their families. A general security agreement duly registered is usually sufficient. The security would not be effective in a bankruptcy until the preference period expires. Time doesn’t start until the security agreement is registered, so the sooner the better.

If you have not secured your shareholder account you should consult with your accountant and lawyer. If you would like more information please contact us at Lazer Grant – 204 942-0300.
A final word of caution: the process is relatively simple but legal and technical in nature. Professional advice should be sought before implementation.