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Financial Planning for Small Business Owners
3 Common Questions Small Business Owners have about Retirement

Mike Watkins, Edward Jones

It’s challenging enough to plan for retirement, but if you’re a small business owner, it can be particularly complex. Here are answers to three of the most common questions small-business owners have about their financial planning.

      1)      Should I save inside or outside my business?

The potential rate of return from investing in your business could be higher than other investments, but it might come with significant risk. On the other hand, saving outside the business in different markets and with different types of investments could diversify – and thereby help minimize – your risk. You’ll probably be best served by doing both, with the exact proportion based on a number of factors, including the maturity of your business. If you’re in the start-up phase, you’ll likely need more invested into your business. As the business matures and you get older, you’ll probably want to save more outside the business.
 
 
2)      What vehicles are best for retirement saving?

One of the best ways to start a retirement plan is to make regular Registered Retirement Savings Plan (RRSP) contributions, so your retirement savings can grow in a tax-sheltered environment. However, small business owners who pay themselves dividends need to understand that while this may have some tax benefits, dividends are not considered earned income for RRSP purposes, so dividends will not increase your RRSP contribution room.

Another option is an Individual Pension Plan (IPP). It’s a company sponsored plan that enables you to contribute larger amounts than is possible with an RRSP.
Your health is another important consideration. Special care – whether at home or in a facility – could eat into your retirement assets, so it might be prudent to purchase long-term care insurance.

It’s also worth noting there’s potential for creditor protection when your savings are invested with an insurance company, although there are limitations. Speak with your tax or legal advisor to learn more.

3)      How do I protect my family if I die?

Providing for loved ones generally consists of two goals. The first is to ensure that any personal liabilities existing at the time of death are eliminated. This includes bank loans, mortgages and liabilities, such as personal guarantees and accrued income tax on assets that have appreciated in value. The second goal is to ensure adequate income for surviving family members, so they can maintain their lifestyle after losing their loved one who provided for them.
 
These objectives can be met by using life insurance to pay off any liabilities and through wills, trusts and dividends to generate income. You should also be aware that a carefully considered and executed will can help minimize taxes the estate would have to pay on death.

It’s also important to have a business succession plan in place. If you die, this will ensure the business is distributed in a manner and for a value that determine. Two key elements of business succession plans are an estate freeze and a buy-sell agreement. An estate freeze simply freezes the value of your business and transfers future growth to the next generation, such as your children. A buy-sell agreement is a legal agreement between owners of a business stating exactly what they want to happen to their business interest during their lifetime and at death. Most buy-sell agreements are typically funded with life insurance because it provides tax-free cash when that’s needed most.

These are just a few examples of the many financial planning considerations small business owners must address. If you own a small business, speak to your financial advisor – along with your legal and tax experts – to formulate a specific plan tailored to your unique circumstances.
 

Mike Watkins, CFP, FMA, FCSI, Ch.P.
 
 
Mchael is a financial advisor with Edward Jones Investments and author of the financial planning guide It’s Only Money. Mike also writes a bi-weekly column for the Victoria Times Colonist called Dollars & Sense. 
 
 
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