Life as a small business owner is busy. Personal financial planning can take a back seat.
We get caught up in everyday tasks. Tasks such as nurturing customer relationships, employee issues and managing cash flow.
These are all time-consuming tasks but are necessary for the smooth operation of a business.
The result being business owners can often neglect their own personal finances.
Personal finances often get put on the back burner until things ‘settle down’.
The problem being things never really settle down.
Lack of time and planning can then cause business owners to fall into one of the following two scenarios:
- They don’t have a defined plan for their future and they can then make decisions they regret down the road
- When things get put on the back burner they miss out on valuable opportunities
As a business owner, you could be continuously benefitting from your business by availing of valuable tax reliefs.
Additionally, you can protect yourself and your family in the long run.
Looking after your business is important. Even more important is looking after yourself.
Here I have outlined some key financial planning tips for small business owners.
Tip #1 Don’t ignore your personal financial and life goals
We can get wrapped up in our business and forget what we want to achieve personally.
Distinguish between both your personal and business goals.
Once you have a good handle on your personal goals the business can be used to help you achieve these.
TIP #2 Draw a Salary
In the early years, it’s common for business owners not to draw a salary.
It may be done ad-hoc, expenses etc.
For tax purposes, it’s important to draw a salary ASAP to create service for tax purposes.
Your service is dictated by the number of years you’ve received taxable remuneration.
The longer service you have, the greater scope you have in the long run for funding back pension contributions or a possible termination payment.
Pay yourself first.
Tip #3 Protect your Salary
Life is unpredictable.
People get injured or fall ill and are not able to work.
We don’t like to think about it happening to us but it can happen.
If it happens we are then faced with drawing cash from our business and this is at a time where income into the business could be decreased or even ceased.
Income Protection is a living benefit that replaces part of your salary if you can’t work due to illness or injury.
Income Protection is the most important of all financial planning and insurance products.
When I say insurance products I include your house and car insurances and pet insurance in that! If you don’t have an income or have a reduced income you may struggle to pay for these.
The Government do not provide any illness benefit to business owners.
Even if they did it only amounts to €10,556 per annum.
It’s crucial you have this in place, even more so if you are the main earner in your household.
The cost of this is deductible against Corporation Tax as a business expense and there is no Benefit-in-Kind implication for you.
As per Aviva, one of the leading providers of protection in the market, the average age for an income protection claimant in 2020 was 48.*
The top three medical reasons for income protection claims were psychological, orthopaedic and cancer.*
Don’t gamble on it not happening, use your business to protect against the possibility it could happen – see Mark’s story.
Tip #4 – Tax-Free Life Insurance
An easy win for a business owner.
If you were an employee of a company, you would likely have Death in Service life cover.
This pays out a lump sum to your family, typically a multiple of salary, usually 4 times.
If you earned a salary of €100,000 this would be a payment of €400,000 to your family.
However, as a Ltd Company owner, you don’t have this benefit.
As business owners, we have a responsibility to our families to ensure that if the worst happens to us, we at least leave behind financial stability.
The good news is your company can effect life assurance on you.
This is tax-deductible against Corporation Tax as a business expense.
Again, as with any form of protection discussion, no one likes to think of this stuff happening to us but it can. It does.
Think about this.
As per Aviva, the average age for a life protection claim in 2020 was 51 for females and 54 for males.*
The top 3 reasons for life claims in 2020 were cancer, cardiac and respiratory.*
TIP #5 Use your company to build your pension
As a business owner, you have a significant advantage over most.
The main advantage to funding a pension through your company, the company’s contributions are tax-deductible.
Tax-deductible against Corporation Tax as a business expense.
There is no Benefit-in-Kind charge and you don’t pay income tax, USC or PRSI on the contributions.
And the limits as to what your company can pay are also significantly higher than what you can pay on a personal basis.
And a secondary benefit of using your company to fund your pension is that this removes the reliance on you selling your business to fund your retirement.
P.S – don’t think you won’t retire. We all will at some point! Plan wisely for it and plan independently from your business.
Good financial planning is about giving yourself options.
Tip #6 Protect your shares
If you have business partners have you discussed a succession plan should one of you pass away?
Should one of you pass away, the deceased’s next of kin could potentially come into the business.
That share of the business could be sold to a competitor.
It’s important that you have a shareholder agreement in place for what is to happen.
You should then have business protection in place to support your agreement.
Business protection will provide the company with sufficient funds to purchase the value of the deceased’s share of the business from the deceased’s next of kin/estate.
As a business owner, it ensures your next of kin receive fair value for your shares.
For the surviving business owners it ensures smooth continuity of the business.
Tip #7 Protect your key people
The key business assets of any business are its people.
Key staff can contribute in numerous ways, it could be financially or via business contacts to name a few.
Keyman Insurance can provide the company with funds on the death of a key employee.
You then have funds to cover the costs of a replacement or loss of profits.
Tip #8 Employ your spouse
Do you have a spouse or even a family member who helps out around the business?
As an example, this could be with admin, marketing, accounts etc.
If they aren’t on payroll, get them on. Once on the payroll they are employees of the company and can avail of employee benefits.
You then have the option of pension contributions for them, tax-deductible against Corporation Tax.
How we can help you
Building and running a business isn’t easy.
It takes time and dedication and it’s important that you avail of any advantages you can get.
Understanding how to use the fruits of your labour for the benefit of you, your family and your business can be confusing.
Fortitude Financial Planning has the skills and experience to create a financial plan individual to yourself to ensure you and your family are on track to meet your life goals.
We will explain this in a simple and honest manner and how best to use your business to help you achieve your personal goals.
If you are a business owner and would like to review or discuss your existing arrangements or set up a new arrangement, request a callback or drop me a mail, francis@fortitudefp.ie.
Alternatively, you can reach me directly on 086 0080 756 or schedule a call.
*Source – Aviva 2020 Protection Claims Statistics
Francis McTaggart CFP® SIA RPA QFA
Disclaimer: All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.
Production