Personal financial planning for small business owners-more vital than you may think
Many Canadians are aware that small businesses are a major force in today’s economy. With the establishment of cost-effective technologies such as the Internet and the personal computer breaking down the high cost barriers of entry, many entrepreneurs are testing the waters of self-employment like never before. According to one estimate by CIBC senior economist Benjamin Tal, by the end of the decade, one-in-five Canadians will be self-employed.
Along with greater independence and the increased earnings potential that self-employment can provide comes a list of potential financial risks. Unlike the majority of Canadians who contribute to and benefit from the Canada Pension Plan, Employment Insurance and company sponsored benefit programs, if their enterprise either fails or they succumb to a disability, small business owners are on their own. This hard fact makes personal financial planning an essential strategy for the owner of a small business to succeed.
The challenges that many small business owners face are often industry-specific and diverse. However, on a more personal level, the financial planning challenges that individuals face often share common ground. For example, during the early stages of a small business start-up when personal income and business income are often one and the same, cash flow management can be an issue. In addition, finding ways to minimize tax is an important step in maximizing personal income.
Once a business is up and running, small business owners face additional challenges that are unique. For example, once a business owner becomes profitable, they need to carefully consider what to do with their money. The natural tendency is to reinvest all of their
profits back into their business. But there are a number of personal risks associated with this strategy. A better alternative may be to invest a portion of the proceeds into market-based investments such as segregated funds, which have the unique feature of providing potential protection from creditors. That way, if the business fails, the owner would have diversified their personal assets and assets and may have something to show for their efforts.
Up and running
For mature businesses, owners are advised to continue the financial planning process to protect their personal interests. Two issues that need to be addressed at this stage are safeguarding their business in case of sudden disability and succession planning. In terms of protecting the business, strategies such as purchasing “key person” insurance and business loan protection are worthy considerations since it can protect the owner from the unexpected. Life insurance can also fund capital gains tax on a business at death, offer split dollar arrangements and buy-sell funding.
For owners looking to pass on their business, succession planning is vital if the owner wants to plan for the significant capital gains charges generated by the sale of, or the transfer to either family members or partners with a stake in the business.
Business owners must understand the importance of beginning the planning process early. Once a business is in trouble, it is almost impossible to establish a plan that protects their interests effectively. Perhaps the most important factor in creating a successful personal financial plan for business owners centres on the issue of timing. Contact your financial advisor today.
Content provided courtesy of Manulife Investments
© Copyright of this article is held by The Manufacturers Life Insurance Company (Manulife Financial). You are free to make copies of this article and to distribute it, either in paper form or electronically, as long as you do not change or remove any part of this work. All other uses are prohibited.
Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. As one of Canada’s largest integrated financial services providers, Manulife Investments offers a variety of products and services including segregated funds, mutual funds, principal protected notes, annuities and guaranteed interest contracts.
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