 |
|||||||||||||||||||||||
|
You Deserve It
Owner/managers are constantly working to build their company, to keep clients and employees happy and, of course, ensure a profit at the end of the day. The large majority of owner/managers are successful at these tasks but fail to see that the most important reason for being self-employed is to ensure the future well being of themselves and their family.
Entrepreneurs are often so consumed with the need for success and growth within the business that they forget the old adage: Don’t put all your eggs in one basket. Owner/managers who have survived the critical first five years of growing a business owe it to themselves to review their business and their goals with a view towards rewarding themselves for the hard work and success that they have achieved.
Reward Your Success Have you put all of your future in your business or do you have personal working capital outside the business’ bank account for riding out a downturn or worse? If your business is incorporated, consider raising your salary to accumulate personal savings.
Far too often, the rewards of working are simply left to the end of the year to see what the profits are going to be. Consider the salary that would be expected if a third party did your job. Revisit your billing practices and pay yourself on a regular basis. Set a goal to put away the equivalent of at least six months’ earnings in personal savings or investments.
Of course, also consider stepping up your RRSP contributions to reduce the impact of income taxes on any additional draw or salary. At the same time, if you are not at the maximum, additional income will increase your RRSP contribution level.
Secure Your Position The profit figure at the end of the year is a welcomed indicator of a successful business. Many times, the owner/manager reinvests the profits back into the business with asset acquisitions, the expansion of premises or the addition of a new product line. Using profits to take care of the future is admirable, but consider curtailing the impulse to invest all the profits back into the business and reward yourself with a bonus or dividend payments.
Owner/managers are sometimes reluctant to take bonuses or dividends because of the cash flow crunch it creates and the income that is taxable income in their hands. To alleviate the cash flow difficulty, consider lending the money back to your company. To protect the investment in the company, be sure to have your lawyer register you as a secured creditor on the assets of the company. Then, if the company does run into financial problems in the future, your investment will not be as at risk as if the investment was not secured. Of course, moving money out and loaning it back cannot be used to defeat current creditors but is a strategy to protect against future claims.
Taxation is certainly a consideration; however, the net difference between corporate and personal income taxes may be a small price to pay to provide for your future and secure your investment at the same time. The use of a holding company may lessen the current taxes payable and still provide this protection.
Lessen Liability In the formative years of a business, owner/managers often have to provide personal guarantees for the company loans. As your company’s debt/equity ratio improves, approach the lender to see if it is possible to have the personal guarantee removed.
When times are good, work towards creating a reserve of working capital for the business. When your business has excess funds, invest in equity or interest-bearing investments, even if only short term. If you can accumulate a base of excess funds, this can serve as security to negotiate a better interest rate for future borrowings — and further enhance your profits. It is often prudent to accumulate these additional assets in a holding company out of the reach of any claims that creditors may make in the future.
Plan for the Unexpected Ensure the survival of the business in the event of disruption. Make sure you have a partnership or shareholder agreement and provisions for dealing with the impact of changes or disruptions. Speak to your chartered accountant about the impact on your business if a business partner dies, if you divorce, or if you die. Your chartered accountant can give you guidance on the appropriate corporate structure as well as the need for shareholder/partnership agreements, buy-out alternatives, and various financing alternatives that can help ensure business continuity and sound estate planning.
Invest Wisely Whether your investments for the future are in your business or also in the stock market, real estate or other ventures, the key is to invest objectively. Invest funds back into the business based upon achieving a return on the investment within a reasonable time frame. If the numbers do not support a reasonable rate of return, do not invest. Similarly, funds drawn out of a business for personal investment represent your future and should be prudently invested to ensure constant growth.
Talk to your broker, financial planner and chartered accountant about your investment strategies. Keep in mind that the profits that you make on your investments are subject to different tax treatments depending on the type of income you receive from the particular investment and whether the investment is inside or outside of an RRSP.
Take Care of Yourself “I will take care of myself” is a credo that all owner/managers should consider. As can be expected, there are both personal and corporate tax consequences to looking after your own interest. To ensure that your decisions are planned and not simply made, discuss your long-term goals and tax planning strategies with your chartered accountant.
|
||||||||||||||||||||||
