Jared Pilon
The second aspect of the "Planning Process' explores the transition from being an employee in your company to becoming an investor.
If your goal is to build wealth, you'll need to take steps to stop trading your time for money.
Focus: turning business revenues into income that you can invest, leading to long-term wealth.
Managing the structure of your business
Is there a need to incorporate your business?
Many entrepreneurs begin their operation as sole proprietors. While this can be an effective way to structure your operation early on, it is not necessarily the most conducive for accumulating wealth. Incorporation can be considered prior to starting a business or can be an option once your business is established and successful. The pros and cons of each structure need to be reviewed to ensure you receive optimal tax treatment for both your business and personal income, as well as adequate liability protection should the situation warrant it.
Are you positioned to maintain Qualified Small Business Corporation status?
Once you decide to incorporate your business, it is important to monitor its status to
ensure your shares continuously maintain Qualified Small Business Corporation (QSBC) status. This tax treatment allows you to gain access to the Lifetime Capital Gains Exemption (LCGE) should you sell your shares or if you realize a deemed disposition on death. In simple terms, non-active assets (excess cash, investments, or non-active assets) need to be purged from your business regularly to stay onside with the QSBC rules. Including a holding company or trust may be considered if you have no need or desire to withdraw these assets personally.
Reinvest in the business
Do you have plans to grow the business?
Owning a business can be a fantastic way to build your wealth. This might include expanding your online presence, operating in multiple jurisdictions, merging with another business or other growth plans.
‘Employee Role’ — When you first open a business, you take on an employee role, which means you work for your business to see it grow.
‘Owner Role’ — At some point, you move into an ownership role whereby hired employees grow the business alongside of you.
‘Investor Role’ — Lastly, you move into an investor role. This will see you making decisions to grow the business but you are no longer not involved in the day-to-day operations.
To achieve ‘investor’ status within your own business, you will need to grow the business, and have a professional team in place to assist you with the implementation and monitoring of the plan.
What are the financial requirements to execute your plans?
Growing your business will require additional funding. Short term growth plans might be fulfilled with an injection of cash from a line of credit. Longer term plans might require term loans to purchase equipment or real property. Additionally, you may seek to bring on an investor or partner to provide equity capital. Each option has pros and cons that should be reviewed in detail with your accountant and lawyer prior to execution.
Invest in a stock portfolio
How should excess funds from your business be invested?
Once you have moved into an ‘owner’ role, you should see excess cash starting to accumulate within the business. There are diverse options that you can explore to invest these funds if you are not interested in or no longer need to reinvest back into the business.
Two predominant options include holding the cash within a corporate owned investment account or withdrawing the funds and investing through RRSP and TFSA accounts. To determine which option works best for you depends on the overall financial situation of the business and yourself personally. Consulting an accountant prior to making these decisions will ensure you avoid unpleasant tax liabilities, now or in the future.
Consulting an investment advisor will allow you to invest these funds to meet retirement goals and ultimately plan for transferring your wealth to future generations.
Purchase passive real estate
If you are purchasing real estate assets, how should you hold this property?
If your business qualifies as a Small Business Corporation, you will want to be aware of certain tax rules that must be met to retain this status. Portfolio and real estate assets held within your corporation can put you offside in respect of these rules.
As a result, it might be more prudent to hold passive real estate assets in your personal name. If you can employ more than five full-time employees in relation to your real estate portfolio, you can gain access to active business income tax rates within a corporation as well as QSBC status.
An accountant and lawyer should be consulted to ensure tax and liability concerns are addressed upfront.
Your next steps
Want to take the next step in the 'Planning Process'? Click the preceding link to download a free copy of the complete 'Planning Process' eBook.
Sometimes, that transition from employee to investor requires insights from experts. Contact us at for one-to-one support to help you see how you can grow your wealth. It is important to have a professional on your team who is up-to-date and looking out for your best interests, like those at Legacy Accounting LLP.
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Posted: 9/26/24
