Investing in your own business eventually reaches a tipping point where you aren’t just concerned with investing time, but also profits. How can business income be invested in a way that preserves the longevity of the business, protecting you in lean times with a nest egg? There’s a lot to learn before making an investment of business profits. Let’s explore not just when the time is right to start investing as a business, but the best way to go about it.
What is the Best Way to Pay Yourself as a Business Owner?
Before you start thinking too much about investing outside the business, it’s important to consider the best strategy to pay yourself. As the founder or CEO, this might be a big step in the history of the business! But just cutting yourself a check as part of payroll may not be the best strategy long-term, even if it is the most straightforward.
One approach to paying yourself as a business owner is take payment in stock or stock options. This is a tax benefit for the business and also reduces your own taxable income. Then later, in times of plenty, you can pay yourself (and any stock-holding employees) through dividends. Typical dividends are not subject to OASDI tax, but the IRS will be monitoring to see if you are still paying yourself a reasonable salary.
During times of great success, you can even pay yourself, and other shareholding employees, extra dividends through a special distribution based on rising profits. It is worth noting that most businesses don’t make more than one special dividend distribution in their histories, so this would occur at a notable moment like changing financial structure or spinning off a new startup.
Tips for Small Business Owners Making More than $250,000
Once you as the business owner are in a position to be making $250,000 or more a year, it’s time to carefully consider how to draw that income from the business. For instance, any salary you pay yourself up to $142,800 in 2021 is subject to old age, survivors, and disability income tax (OASDI) that will be paid by both you and your business.
With both business taxes and personal income taxes to consider, proceeding to pay yourself without strategy could mean you end up paying more than necessary. Here are a few alternatives to consider outside a paycheck:
- Owner’s Draw: While a salary is paid at regular intervals, an owner’s draw allows you to take pay from the business as needed. This will still be taxed as regular income on your personal taxes but allows you to be flexible in the amount taken from the business based on performance.
- Real Estate Investment: You can take an owner’s draw and reinvest this into real estate for the business, which will lead to a depreciation and tax savings for the business (and yourself, if the business is not a C Corp).
- 401(k) or IRA: Rather than taking income as a salary or draw, you can make investments into a retirement plan to shelter some income from taxation. Different plan types and structures like profit sharing or cash balance can allow you to save more.
These are just some of the strategies a business owner can use to get the most personal value from a successful business, while also protecting the business from unnecessary tax liability.
Can My LLC Invest in Stocks?
An LLC can buy stocks just like an individual. You will have to open a “taxable” or “brokerage” account on behalf of the business. However, it’s important to remember that an LLC is not considered an entity by the IRS, but is instead a pass-through entity. This means that you as the owner will report income, losses, and dividends on your personal income taxes.
With recent tax law changes in 2017, this income may be subject to a 20% income deduction. Our CPA’s at Delta Wealth can help advise whether this applies to your situation.
Can a C Corporation Invest in Stocks?
C corporations can invest in both stocks and bonds. However, stock investing as a business gets complicated quickly. It’s important to understand that C corporation capital gains are taxed as regular income. This means that C corporation investing is taxed at 2-3 times what an individuals’ investments would be taxed. And lastly, losses in the investment portfolio are more difficult to use as a deduction. While investing in stocks might still be a great move to secure the future success of your business, it’s essential to work with an experienced CPA to protect yourself and avoid excess taxation.
Plan Smart Investing in Your Own Business with Delta Wealth Advisors
Outside stocks, some of the best places to invest money right now are high-yield bonds, corporate bonds, and high-yield savings accounts. The correct decision depends on when you expect to use the cash. We favor high-yield savings accounts for immediate spending needs and high-yield bonds for expenses in 2023 and beyond. These investments, like any investment, come with risk, but may be easier to plan for in terms of taxation.
Whether you are investing short-term or long-term, the tax implications are just part of the consideration. Delta Wealth Advisors is a one-stop service provider for investment management, bookkeeping, and business tax services. We want to help you create and cultivate a business investment strategy that will help your company thrive. Whether you are curious about changing your business’ financial structure or managing the complexities of your own net worth, we are here to support you in all financial aspects. Contact us today to have a candid conversation about your goals and questions.