Doug Constable: Do you want to help a family member start their business – by investing some money as startup capital? Think twice before deciding to become a director as well. Savvy investors know that when they put cash on the line (either through shares or venture capital), they have a great chance of never seeing that money again. But since they aren’t usually directors, they don’t share the liabilities if any debts are incurred. Do your research and invest wisely. If you don’t think that the person you’re investing in can actually run the business, think again before putting up the capital!
Last week I saw clients who had received director’s penalty notices for their business. The wife was an accountant, the husband was starting his own business, and the father of the husband wanted to help his son by investing $100,000. So the wife set up the business with three directors: herself, the husband and his father.
Now down the road, the business got into trouble for a number of different reasons – some of their own doing, and some not of their doing – just a few unfortunate circumstances.
As a result of this little downturn, the tax office was owed some money. They made several arrangements to pay and had been unable to meet them, and so director's penalty notices were issued, to the wife, the husband and the father. The husband and wife had a house that they jointly owned, the father had a motel that he owned.
Now, there wasn’t really any option for them but to pay, or go bankrupt and then have all their assets sold to meet the debts. Each of them became equally responsible for the business’ liabilities.
So, my advice is, when you go into business, have only one person as director. Then, if anything happens to the business, its only one person’s assets on the line. Only one person then has to shoulder the burdens brought on by any change in fortunes.
If someone feels you need to have multiple directors, then you probably shouldn’t be going into business with that person. If the father felt that he needed to be a director to loan his son money, perhaps he shouldn’t be investing in that business. Now, as a director, he has put himself on the line and taken responsibility for the whole business, and the whole amount of the tax owed.