By Clare Curley
Even in construction, separating your personal interests from your business’ finances is one of the most important safety measures you’ll ever take.
When Rob Carol ran a construction company in Vancouver, he learned you don’t have to be negligible to get caught up in a lawsuit. A condo he had worked on developed a leak, and the owners planned to sue everyone involved in the building’s construction down to the siding supplier. But Carol didn’t have to worry about his own liability—his business was incorporated and he had insurance. While corporations can be sued, most of the time people won’t bother because they realize that such entities aren’t going to have a lot of assets, Carol adds. "People are more likely to sue you if you’re not incorporated and if you have assets worth going after, such as a house."
Fortunately for Carol, the suit was dropped. But the careful separation of his business from his personal assets was a safeguard in place to protect him financially, in the case of other litigious situations. Still, there’s a tendency, particularly in smaller construction companies, to mingle personal and professional finances. That’s a serious mistake from an organizational standpoint. By keeping things separate, you’ll find it easier to organize the business, monitor projects and become less vulnerable to the myriad unknowns that come up on the job.
Contracting businesses typically start out as sole proprietorships, which have some advantages such as tax simplicity and not having to register your business. But that type of entity accumulates risks as the company grows—risks that could be avoided by incorporating the business. As a sole proprietor, your business is an extension of yourself, making you personally responsible for any debts and liabilities the business accrues. If you set it up as a Limited Liability Company (LLC), then you can’t be held personally liable for most of the company’s debts or other obligations. "However, there are exceptions, including money owed for taxes," Carol says.
Without this in place, an illness, loss of manpower, bankruptcy or other unforeseen circumstance may leave your personal assets vulnerable. "If you get sued and your insurance doesn’t cover it, they’ll come after the corporation," Carol says. "But, they can’t come after your house or other possessions."
True, incorporating requires keeping a minute book and paying varying setup fees to the government—$325 in British Columbia versus $225 in Alberta—but it’s easier than people think and could more than pay off in the long run, Carol says.
Some contractors think they’re protecting their company by reaching into their own pocket to cover business expenses—or vice versa—but doing so puts them on a slippery slope.
Lee Carey, president of Small Business Association of Canada (SBA-Canada), urges small business owners to manage every aspect of their business with a separate set of records. Doing so will help you stay focused on growing the business and make it easier to anticipate budget shortfalls before they occur.
Carey suggests establishing business-only banking and credit accounts in order to be more aware of business expenditures and reduce the temptation of using personal funds. "A lot of times before people get a corporate card they’ll mix things up and then sort them out later," Carol says. "It can get complicated and will drive your bookkeeper wild. It’s much easier and safer to keep things separate."
Once you acquire that corporate line of credit, you still need to be conscientious about how you spend it—businesses have had their credit lines shut down because their owners used their corporate line to pay for personal raises and bonuses. "You have to be careful about paying yourself an appropriate salary and leaving enough money in the company for operating costs," Carol says.
"If you can avoid debt altogether that is great— but business debt is better than personal debt because you can deduct the interest paid and reduce taxes," Carol says.
Supporting your company through business accounts and banks loans could actually help you pay down your personal debts more quickly. Furthermore, Carol urges contractors to negotiate with banks to have their personal assets removed from loan guarantees. He adds that many construction owners don’t know how those attachments are negotiable.
Using company cars for personal use is a common mistake in small construction businesses, according to Carey. Consider the tax consequences alone: People who use a car for work and personal use can deduct the percentage of expenses related to earning income—an important tax write-off for contractors.
But that doesn’t include travel between work and home, let alone trips to the grocery store. The government requires some people to pay income tax on their personal use of a car, making it crucial to keep meticulous records of work travel. Moreover, the Canada Revenue Agency (CRA) could charge the driver with a "standby" charge and other fees if proper records don’t exist, and that could add up considerably.
No construction company is entirely foolproof, but setting up a sound financial structure for your business will help ensure a smoother road ahead. For more information on building a fiscally responsible business, visit the Business Development Centre at www.bdc-canada.com/BDC/index.html.