TOP 10 FINANCIAL PLANNING TIPS FOR BUSINESS OWNERS
Financial planningAuthor :
Tina Tehranchian 
Tina Tehranchian, MA, CFP, CLU, CHFC, is a branch manager and financial advisor with Assante Capital Management Ltd. - member CIPF, located in Richmond Hill, Ontario and can be reached at 905-707-5220 or through her web site at www.tinatehranchian.com. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.
1- DIVERSIFICATION -
Most business owners invest the bulk of their savings in their business because they understand it well and know how to make a profit. In other words, the business is their retirement plan. However, this means that they tend to have all their eggs in one basket and if the profitability declines so will their savings and overall wealth. It is prudent for business owners to diversify their investments to reduce their risk and take advantage of negative correlation between different asset classes such as equities, real estate and bonds.
2- CREDITOR PROTECTION –
The bulk of the wealth of most business owners is tied up in their business. As a result, they are at risk of losing their biggest asset if creditors come after the corporation’s assets or sometimes even their personal assets, should they have personally guaranteed the loans of the corporation. Therefore, it is important for you to plan to protect your assets from the claims of creditors. This could be achieved by transferring personal assets to the name of your spouse, setting up holding companies, family trusts, or investing in creditor- proof instruments such as segregated funds offered by life insurance companies.
3- RISK MANAGEMENT –
Many small businesses depend on key people such as the owner or managers for their successful operation. It is important to make sure that there is sufficient key person insurance in place to cover the risk of losing these people due to long term disability, premature death or critical illness.
4- SUCCESSION PLANNING –
While many entrepreneurs view their businesses as a tool to fund their retirements, few have thought about the tax liabilities of selling that business or how to pass it to the next generation and then derive income. This requires careful advanced planning and consultation with a certified financial planner, as well as an accountant and a lawyer who specialize in succession planning.
5- SHAREHOLDER AGREEMENTS –
If there are several shareholders who own the business or in a partnership situation, it is crucial to spell out the terms of the arrangement in a shareholder agreement at the beginning of the business or while everyone is on good terms. A shareholder agreement should stipulate a method of valuating the business and set out the terms for buying and selling of shares in the business in the event of premature death, long term disability, retirement, early exit, or even in the event of divorce of married shareholders. It is important to ensure that shareholder agreements are properly funded.
6- USE OF CAPITAL DIVIDEND ACCOUNT –
Life insurance is a tool that is most frequently used for succession planning as well as for funding of shareholder agreements. If the company owns life insurance on the entrepreneur, the insurance company pays out the death benefit to the firm. Then the CRA allows a tax-free distribution on net proceeds through the company’s capital dividend account, which can pass directly to a spouse or other family member.
7-UNIVERSAL LIFE INSURANCE AS A TAX SHELTER –
While life insurance is mainly purchased for protection against the risk of premature death, universal life policies allow you to save money on a tax-deferred basis as well. These policies are extremely flexible allowing you to stop and restart your premium payments or to shelter lump sums of money from taxes. They are ideal for business owners with fluctuating cash flow and those who need a tax-deferred savings vehicle that allows them to save money over and above their RRSP contribution limit.
8- INDIVIDUAL PENSION PLANS –
Most small and medium sized businesses do not have the luxury of defined benefit pension plans that larger businesses offer their employees. The owners, however, can put into place Individual Pension Plans for themselves and their key employees. These plans are similar to defined benefit pension plans and allow significantly more tax deductible contributions than the RRSP contribution limit.
9- HEALTH INSURANCE –
Business owners can put in place group health and dental benefit plans for themselves, as well as for all or some classes of their employees. The contributions to these plans are tax deductible to the business and are not taxable to the employees.
10- HEALTH SPENDING ACCOUNTS –
By setting up a health spending account as a supplement to their group health and dental plan, business owners can pay for medical procedures as varied as elective cosmetic surgery and botox injections to orthodontics and visits to health practitioners that may not be covered in their health insurance plan or go over and above the limits set in it. The contributions to the Health Spending Account are a deductible business expense for the corporation and the benefits are not taxable to the shareholder or employee.
Most business owners invest the bulk of their savings in their business because they understand it well and know how to make a profit. In other words, the business is their retirement plan. However, this means that they tend to have all their eggs in one basket and if the profitability declines so will their savings and overall wealth. It is prudent for business owners to diversify their investments to reduce their risk and take advantage of negative correlation between different asset classes such as equities, real estate and bonds.
2- CREDITOR PROTECTION –
The bulk of the wealth of most business owners is tied up in their business. As a result, they are at risk of losing their biggest asset if creditors come after the corporation’s assets or sometimes even their personal assets, should they have personally guaranteed the loans of the corporation. Therefore, it is important for you to plan to protect your assets from the claims of creditors. This could be achieved by transferring personal assets to the name of your spouse, setting up holding companies, family trusts, or investing in creditor- proof instruments such as segregated funds offered by life insurance companies.
3- RISK MANAGEMENT –
Many small businesses depend on key people such as the owner or managers for their successful operation. It is important to make sure that there is sufficient key person insurance in place to cover the risk of losing these people due to long term disability, premature death or critical illness.
4- SUCCESSION PLANNING –
While many entrepreneurs view their businesses as a tool to fund their retirements, few have thought about the tax liabilities of selling that business or how to pass it to the next generation and then derive income. This requires careful advanced planning and consultation with a certified financial planner, as well as an accountant and a lawyer who specialize in succession planning.
5- SHAREHOLDER AGREEMENTS –
If there are several shareholders who own the business or in a partnership situation, it is crucial to spell out the terms of the arrangement in a shareholder agreement at the beginning of the business or while everyone is on good terms. A shareholder agreement should stipulate a method of valuating the business and set out the terms for buying and selling of shares in the business in the event of premature death, long term disability, retirement, early exit, or even in the event of divorce of married shareholders. It is important to ensure that shareholder agreements are properly funded.
6- USE OF CAPITAL DIVIDEND ACCOUNT –
Life insurance is a tool that is most frequently used for succession planning as well as for funding of shareholder agreements. If the company owns life insurance on the entrepreneur, the insurance company pays out the death benefit to the firm. Then the CRA allows a tax-free distribution on net proceeds through the company’s capital dividend account, which can pass directly to a spouse or other family member.
7-UNIVERSAL LIFE INSURANCE AS A TAX SHELTER –
While life insurance is mainly purchased for protection against the risk of premature death, universal life policies allow you to save money on a tax-deferred basis as well. These policies are extremely flexible allowing you to stop and restart your premium payments or to shelter lump sums of money from taxes. They are ideal for business owners with fluctuating cash flow and those who need a tax-deferred savings vehicle that allows them to save money over and above their RRSP contribution limit.
8- INDIVIDUAL PENSION PLANS –
Most small and medium sized businesses do not have the luxury of defined benefit pension plans that larger businesses offer their employees. The owners, however, can put into place Individual Pension Plans for themselves and their key employees. These plans are similar to defined benefit pension plans and allow significantly more tax deductible contributions than the RRSP contribution limit.
9- HEALTH INSURANCE –
Business owners can put in place group health and dental benefit plans for themselves, as well as for all or some classes of their employees. The contributions to these plans are tax deductible to the business and are not taxable to the employees.
10- HEALTH SPENDING ACCOUNTS –
By setting up a health spending account as a supplement to their group health and dental plan, business owners can pay for medical procedures as varied as elective cosmetic surgery and botox injections to orthodontics and visits to health practitioners that may not be covered in their health insurance plan or go over and above the limits set in it. The contributions to the Health Spending Account are a deductible business expense for the corporation and the benefits are not taxable to the shareholder or employee.