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[OP]
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incorporate to protect assets

I know incorporation can protect personal assets from seizure butt how about divorce? Can incorporation protect the company from its assets and structure in the unfortunate event of a divorce?
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NEMESIS_2008 wrote:
May 4th, 2011 7:49 pm
I know incorporation can protect personal assets from seizure butt how about divorce? Can incorporation protect the company from its assets and structure in the unfortunate event of a divorce?

Absolutely. That's why it is critical to have the proper share structure and restrictions from the get go! Over-the-counter incorporation kits/templates won't generally provide any real protection-----the spouse can simply acquire half of the shares of their spouse in the corporation and acquire the rights attached to those shares. And restructuring the corporation during an pending divorce or a reasonably contemplated divorce (e.g. pre-separation but attending marriage counselling, etc.) will likely trigger a whole slew of issues regarding attempts to devalue your wealth and/or fraudulent conveyances issues. Such structuring should have been done from the get go since it can then be justified as having been commercially motivated, as oppose to an attempt to remove/restrict a spouse's entitlements now.

Regardless though, if you or another material shareholder are confronting family issues, definitely go speak to a business lawyer first before talking to a family lawyer. The business lawyer will know how to implement various strategies to minimize the impact of the family law rules regarding division of assets. By talking with the other shareholders and getting them to all agree to corporate restructuring, the 'corporate lawyer' is not conflicted since they are acting on behalf of the company itself and not you personally. That is, the lawyer simply implementing the intentions of the governing mind of the corporation, not just that of one shareholder. The family lawyer will instead represent the personal interests of the shareholder regarding their divorce issues. You don't want to confuse/conflict the issues.

Most corporation shareholders will also definitely want to ensure such protections are implemented in to the corporation so as to avoid having to sit at the table with a disgruntled spouse or worse yet, have to endure the wrath of some scorned spouse who purposely is withholding their support for something that requires unanimous agreement or disagrees with the way the business is going, or simply overloads the business with too many demands. It can get even MORE complicated, if the ex-spouse dies (and an un-related person enters the business) or the shareholder has more than 1 ex-spouse, etc. The corporate soap opera then begins!
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Jan 20, 2011
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a corporation can also protect you during a bankruptcy if memory servers we well.
[OP]
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Thanks for the replies. Some background info about me, my company is currently a sole propeitorship security guard service provider. I just opened my office and currently do not have any business yet nor do i have any employees. Currently i do not have any relationship problems with my wife but i want to protect myself in the future. I will be making an appointment with a business lawyer today but just want some more answers here before the appointment for a better understanding:

1. I am the only employee so far. Should i incorporate, i will have to appoint other people as shareholders such as my dad and monm (they are both divorced). Lets say 40% for my dad, 40% for my mom, and 20% for me. Should a divorce happen, my spouse can only go after tje 20%. Am i on the right page here? I will also have them sign a will in the event of their death the shares are mine.

2. What happens to vehicles and other assets in the event of a divorce? She can only go after 20% of its value?

Thanks for the advice!
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1) Your wife could acquire 50% of your ownership stake in the corporation (i.e. 10% of the shares of the company). Some courts have actually allowed spouses to acquire the property itself (i.e. the shares themselves), while most courts order that the spouse is only entitled to the VALUE of those shares at the date of separation. Keep in mind though that if the shares are about to materially increase/decrease in value (i.e. an IPO or pending buyout) the courts can adjust the value of those shares. This is a fair thing, otherwise, many people would consider getting divorced just before someone like Google buys their company!!! :)

2) As for inheritance, if your parents will bequeath their shares to you in their will, they must make certain that the proper clauses/provisions are EXPRESSLY included in THEIR wills so that those gifts are not shared with your spouse at divorce. For instance, if the parents die and you inherit their shares while you are still married, then those shares would form part of the marital assets that can be divided as per the 'net equalization payment' formulas. Now, if the proper family law provision exclusion statements are included in the will, those assets will be excluded from division. That is why it is important to retain a lawyer to do a will instead of using DIY kits so that you can ensure such added protections are included-----otherwise, your saving a few hundred bucks doing your own will could literally cost you several thousand or hundreds of thousands of dollars when life events such as divorce arise!
[OP]
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Thanks robberbaron! i am going to consult a business lawyer today!

What about the assets of the corporation? Can she aqquire a percentage of the valued assets based on my shareholder stake?

As for the shareholder stake, should i have a majority of the shares (40% me, 30% my dad, 30% my mom) in order to maintain control or should i hold a minoriy share to limit my liability from my spouse?
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NEMESIS_2008 wrote:
May 5th, 2011 5:05 pm
Thanks robberbaron! i am going to consult a business lawyer today!

What about the assets of the corporation? Can she aqquire a percentage of the valued assets based on my shareholder stake?

As for the shareholder stake, should i have a majority of the shares (40% me, 30% my dad, 30% my mom) in order to maintain control or should i hold a minoriy share to limit my liability from my spouse?

No, your wife could only acquire 50% of YOUR assets; the assets of the corporation are not yours personally---they are that of the corporation (another 'person' totally different). However, your SHARES in the corporation ARE your assets---hence, she can acquire 50% of the value of YOUR shares (although in rare circumstances she could actually acquire the physical shares instead of just a value payout---though that is seldom the case).

Accordingly, since a shareholder does not own the corporate assets or even any portion of them personally, the corporate assets cannot be seized, lien, encumbered or executed against, unless the obligation is a corporate one. The voting privileges, dividend privileges, share privileges of each share ARE part of the personal property of that shareholder (i.e. share in the corporation) and can therefore be subject to seizure, encumbrance or executed against-----after all, those are property rights that the shareholder holds personally by virtue of owning the share.

Many people confuse this concept thinking that because they own 40% of the corporate shares that must also mean that they own 40% of the corporate assets. That is not the case. Only a partnership (or trust (in very rare circumstance)) can allocate a percentage of asset ownership. Instead, all the assets of a corporate business are owned by the corporation! And, only upon dissolution do the assets ever convert from being corporate assets to personal assets of the shareholder, usually according to their equity stake and priority of payout. Therefore, so long as the corporation continues, the assets are of the corporation and not the shareholders.

It is for this reason that incorporations will devise share structures that include shares that can be retracted/redeemed upon certain events (e.g. death of shareholder, divorce, etc.). Coupled with a shareholders agreement and insurance policies (so as to have money to pay for the retractable/redeemable share buyout), several strategies can then be implemented to protect the corporation itself from having to worry about more people joining the inner circle (e.g. ex-spouses voting, etc.).
[OP]
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One last question robberbarron, who is in charge of the corporation and makes the decisons?
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NEMESIS_2008 wrote:
May 5th, 2011 7:56 pm
One last question robberbarron, who is in charge of the corporation and makes the decisons?
Ultimate,y the shareholders are. They elect a "board" and the "board" hires a CEO and the CEO is the top man who hires/runs the corporation on a day to day basis.

Same with a small corp like yours.

Generally, the shareholder themselves would be the "board" and hire the CEO (which you want to be you)

however, in the scenario and distributions you have outlined, your parents would "control" the board and can decide who will be CEO (which could be one of them while you are left as the hired employee)

I wouldn't be surprised if there is little you can do to ensure that their wills ensure that the shares revert solely to you.
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NEMESIS_2008 wrote:
May 5th, 2011 7:56 pm
One last question robberbarron, who is in charge of the corporation and makes the decisons?

Resolutions of the Board of Directors and/or Shareholders are the controlling mind of the corporation. While certain individuals can be given binding authority over the corporation, those powers are provided for via Board resolutions-----thus, in general, it is the Board that controls the corporation and makes the ultimate decisions. However, if all the shareholders sign a unanimous agreement, they CAN usurp Board powers and become the governing mind.

As CheapScotsman mentioned, the Directors are elected by the Shareholders. The Board must then choose a "chairperson" to oversee its meetings and ensure they comply with the rules.

However, just as a clarification, you should know that a corporation does NOT need to use the title "CEO" to represent the most senior "officer" of the corporation. That role can be called whatever you'd like so long as your By-Laws outline the powers of such officer. For instance, some corporations prefer to use the title of President to serve such functions, etc. The term "CEO" is simply one use in general practice but it is not a legal requirement and some corporations prefer to avoid using such titles so as to be different.

On a final note, a will can be changed as many times as you'd like BEFORE you die. Therefore, the family law exclusion provisions that I mentioned can be added to the will of your parents at any time before their death. A person can change their mind on what or how they give anything to another so long as they have not already done so. A Will really is a useless piece of paper during a person's lifetime (it has no binding authority on anyone)---therefore, a person can change it whenever and however they wish before it actually takes legal effect (i.e. when you die!). You can read section 4(2)(2) of Ontario's Family Law Act to see the legal basis for excluding property such as shares and the income that they can derive (e.g. capital gains, dividends, etc.). Just be sure the provisions used in the Wills are in accordance with the case law and legislation in this area-----an estates lawyer will easily know this. Those provisions have be clearly written and take into account a lot of possibilities; therefore, it is a crucial element in drafting Wills.
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I am not an accountant. But what if the company goes belly up and into debt. Can the ex-spouse force the other ex-spouse to take responsibility for 50% of the money owed?
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MrKap wrote:
May 5th, 2011 10:10 pm
I am not an accountant. But what if the company goes belly up and into debt. Can the ex-spouse force the other ex-spouse to take responsibility for 50% of the money owed?
Just to clarify, when a corporation dissolves, is wound up or goes bankrupt, the shareholders are not personally responsible for any of its debts, unless they expressly personally guaranteed them.

Therefore, if the debts you speak of are the corporation's, then the shareholders are not going to be personally liable for them and thus by extension the ex-spouse is also not on the hook (or any portion) for them either. However, if the shareholder guaranteed the corporate debts then those liabilities will now become personal obligations (since the creditor can lay claim personally against the guarantor--i.e.shareholder!) and thus those debts ARE then factored into the net equalization payment formulas for divorces.

It all really comes down to what is corporate and what is personal in nature. If it is corporate in nature (such as corporate assets) than that is another person entirely (i.e. the corporation)----the spouse cannot lay claim to that since he/she is not married to the corporation. On the other hand, if the asset/debt is personal in nature (i.e. shares in the corporation) then such things ARE included in the asset/debt pools of each spouse to determine the equalization between them.
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CheapScotsman wrote:
May 5th, 2011 8:15 pm
Ultimate,y the shareholders are. They elect a "board" and the "board" hires a CEO and the CEO is the top man who hires/runs the corporation on a day to day basis.

Same with a small corp like yours.

Generally, the shareholder themselves would be the "board" and hire the CEO (which you want to be you)

however, in the scenario and distributions you have outlined, your parents would "control" the board and can decide who will be CEO (which could be one of them while you are left as the hired employee)

I wouldn't be surprised if there is little you can do to ensure that their wills ensure that the shares revert solely to you.

There is some really good information in this thread, however I want to add a little regarding the parts I've bolded.

A Unanimous Shareholders Agreement ("USA") could be used to resolve both of these issues. A USA can be used to give you "control" of the corporation even though you only own 20%. (i.e. you are the only shareholder who gets to choose directors, for example). The USA can also dictate what happens to shares in the even the shareholder dies.
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canehdianman wrote:
May 6th, 2011 10:49 am
There is some really good information in this thread, however I want to add a little regarding the parts I've bolded.

A Unanimous Shareholders Agreement ("USA") could be used to resolve both of these issues. A USA can be used to give you "control" of the corporation even though you only own 20%. (i.e. you are the only shareholder who gets to choose directors, for example). The USA can also dictate what happens to shares in the even the shareholder dies.

Unfortunately, a USA does not really provide much protection for a divorce since the acquisition of the shares by the spouse simply increases his/her assets available to be split with the spouse (i.e. they now own more shares!). Thus, the parents should include the family law exclusionary provisions in their will so that the value of those shares and any income derived from them are excluded from their son's family property, in the event of divorce.

Of course, one of the best protection strategies is to use a trust to own the shares, but beyond the greater tax and reporting costs, most people have little understanding of trust law works. For this reason, proper share structuring is done when incorporating so as to provide the next best thing (e.g. having redemption shares, retraction shares, etc.). However, if the shares restrictions were just borrowed from some template or a DIY kit, its likely going to be substantially harder and costlier to devise good protection strategies since they don't generally provide for such things---they just want to give you a valid corporation.

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