Tips For Business Wealth Management
Business owners work hard at perfecting their business to make a living, earn a profit and ultimately sell or transition the business to another group of owners or family members. At the end of the year, our income statements and balance sheets generally indicate whether we were successful. You work incredibly hard to streamline operations, manage costs and perfect processes to leverage your ability for building wealth for yourself and your family. If you’re successful in building your business and making it profitable, wouldn’t you want to ensure that your leveraging the same sort of approach to get money out of your business tax-effectively and efficiently?
Also, you want to mitigate against something getting in the way of those long-term plans. You want to ensure you create business wealth management for your organization. Also, you want to create a business exit strategy that you control and allows for the maximum sale price for your company when it becomes time to sell and not a fire-sale approach to your retirement.
Whether you are looking at creating a business retirement plan, creating a business exit strategy, creating tax deferral strategies with your business or create better corporate financial planning, these tips will all help you get to that financial sweet spot.
Tip #1: Managing For the Unexpected
When a business owner is asked, “what is your biggest financial asset?” many will say their business. But in actuality, it’s the business owners’ ability to earn a future living. Many business owners, especially in the earlier stages, are integral to their companies success and growth. If the business owner were to become disabled, become sick or die, their family’s future, their business and its employees take on a precarious path. Ensuring that business interruption insurance, critical illness, disability and life insurance is discussed and contingency plans are laid out if such a tragic occurrence.
Tip #2: Start Your Succession Planning Early
Creating the right business exit strategy doesn’t occur overnight. In fact, having a potential successor to the business is only part of the equation. Agreeing to the right purchase price, the seller is content with it, and the buyer is willing to pay a huge consideration. Often the two parties are emotionally years apart. Leveraging a permanent life policy can not only soften the sticker shock for the buyer, but the seller is far more likely to get the price that he/she demands. Succession plans rarely can come together overnight. If undertaking overpaid insurance policies, the discussions need to take place at least a decade in advance for this strategy to be successful.
Tip #3: Minimizing Your Tax Obligation
By no means are we talking about bilking the government out of their pound of flesh but legitimate strategies to either defer paying taxes or significantly reducing your tax load. For example, utilizing a Pension Plan for business owners or leveraging permanent life insurance can greatly reduce your tax payables.
Tip #4: Utilizing Alternative Capital Solutions
The cost of capital can be the lifeline for business owners. When you don’t need them, the bank is there and nowhere to be found when you need financial alternatives. Secondary lenders may be more lenient, but their cost of borrowing can be expensive. Paying yourself in the form of a permanent life insurance policy can be tax favourable and tax-deferred growth and expense to the business. Shareholder buyouts, succession plan strategies should look at leveraging insurance as an alternative strategy.
Tip #5: Setting Up Your Own Personal Pension Plan
Setting up a private pension through your business is not a new concept. Creating a Pension Plan for business owners has allowed greater flexibility regarding contributions on a year-to-year basis than an Individual Pension Plan. There are many tax and contribution advantages for the PPP over its predecessor. The PPP or IPP have both been called a supercharged RRSP for business owners. So now, a business owner can take advantage of those very profitable years and hold off in those leaner years. The IPP can still be advantageous for business owners or professionals on a fixed and more predictable income. Still, the PPP has proven to be a better pension option for most business owners with unpredictable cashflows and income fluctuations. Here’s a great video to explain the benefits.
Tip #6: Retirement Plans For Business Owners
If you are taking a salary of at least $140,944 (RRSP maximum level for 2015), utilizing the full level of an IPP or PPP, dividend or bonus out to yourself at your yearend and/or have a considerable amount of retained earnings left in your business then an Insurance Retirement Plan (IRP) may make a lot of sense for getting money out of your business tax-efficiently and save a considerable amount for your financial nest egg. An IRP owned by your corporation grows tax-free (whereas investments within your corporation are taxed at the highest corporate tax level.) Depending upon how you want to access the cash value within an Insurance Retirement Plan, you can access it or leverage the value in a tax-advantageous manner.
Tip #7 Corporate Charitable Giving
Donating to charities is not only a way to benefit your favourite cause but also an opportunity to receive a huge corporate tax credit. So, when given a choice, would you rather donate to a cause you’re passionate about and build a tremendous legacy for yourself and your family, or pay taxes to the government? Here are some tremendous opportunities to consider when donating to a charity.
Tip #8: Is Dividending or Bonusing Out Profits The Best Solution?
When a business owner dividends or bonuses out profits at the end of the year, he or she are receiving this money paying taxes at or close to his/her marginal tax rate. In Ontario, that could mean as much as 53.53% in taxes! Exploring alternatives like a Personal Pension Plan or an Insured Retirement Plan may make much better long term sense for your financial wellbeing.9
Tip #9: Building Creditor Protected Assets
As a Business Owner, we try to protect our personal and business assets, but this is not always possible. We can keep assets in a Holding Company (moving assets from our Operating company) to help safeguard against creditors in the event of a lawsuit. You may want to further safeguard your assets by keeping them in a segregated fund, creating an Insurance Retirement Plan within your HoldCo or sheltering your individual pension within a Personal Pension Plan or Individual Pension Plan or set up a Retirement Compensation Arrangement. Although no means is entirely foolproof, this will create an added layer of protection for your hard-earned money.
Tip #10: Set Up a Health Care Spending Account
Many business owners provide benefit plans for their employees. There is a tremendous cost to a business in doing so. Many plans are not comprehensive and often include copays and/or deductibles. Many business owners include themselves on the regular employee benefit plan and thus are subjected to the same plan exclusions and copays. These exclusions or limited coverages (including orthodontics, glasses, major dental or paramedical practitioners) are often paid for in after-tax dollars. These out-of-pocket, after-tax benefits can be run through the business as a legitimate business expense provided that the expenses are fair and reasonable. The best means of doing this is through a Health Spending Account available through any number of adjudication and administrative service providers.
Many of the concepts discussed in this blog were foreign to me when I owned my last business. Needless to say, had I undertaken even a few of these ideas, my financial situation would have been much different when we closed the business down. Whether your motivation is protecting your family, business or retirement, all of these ideas should be explored and considered.
Not every solution may be appropriate for your situation, but it’s important to understand some of the opportunities available to you as a business owner. It’s also important to consult with your Business Financial Advisor to ensure that these corporate tax planning strategies are appropriate for you and your business.
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Chris Coulter is the Founder and President of The Finish Line Group. Chris works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies and allow them to create a strategy to exit their businesses on their terms. Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing many opportunities to create significant wealth. Chris found out the difficult way and now educates business owners on avoiding many of his former oversites and ultimately controlling their finish line.