Specialist
It’s different being a business owner. You start off not knowing if you are making the right decision, going from a secure salary to being your own boss, not knowing if you will still be open for business in a year’s time.
A lot of sacrifices are made to create and grow a business. I am asked by business owners if they is anything else they should be doing to increase their wealth? I tell them the first thing they should look at is the value of their business.
Investing
Your start your new business with no income and no clients. You take a small salary as you plough as much money as you can back into the business. This can be buying more stock so you can increase the volume of sales or marketing to grow awareness of your business. Even as the business grows you keep your salary at modest levels so you can keep using cash to grow the business.
What you are doing is investing…in yourself. But a lot of people don’t see it as that. So lets put it another way. If you bought shares in Amazon, you would be a tiny owner in a massive company. You would have no influence over the day to day strategy of the company or what it did to grow. You don’t even get a dividend as they reinvest profits back into the company to grow it.
That is what you are doing but on a smaller scale. You take a reduced income so that you can grow the company. Except this time, you aren’t a tiny owner, you are the controlling shareholder. You control how much money is invested back into the company and what it is spent on. When you get your decisions right, you enjoy bigger returns. When you get them wrong, you suffer bigger losses.
Retirement
When I was working on sales targets, my focus was on making the sale and getting that commission. “The most tax efficient way of getting money out of a business and into your own hands is a company pension.” That isn’t exactly true, CGT Retirement Relief is, where if certain conditions are met, you can get a complete exemption of capital gains tax for disposals of up to €750,000. Another option is Entrepreneur Relief where you pay a reduced rate of 10% capital gains tax for gains up to €1 million.
In saying that, I do not recommend that a business owner completely neglects pension funding and only concentrates on CGT Retirement Relief, they should do both. We do not know what the demand for your business will be when you want to sell it and you don’t want to be completely reliant on being able to sell your business as your retirement income. Pensions are still a great way of getting cash out of the business and into your own hands and your business can treat the contributions as a business expense.
It is important to look at how you can create a value for your business. How can you position it so it is something that someone else wants to buy that is not reliant on you being there as part of it. For many, that is that is the biggest problem.
Article supplied by Steven Barrett - MD at Bluewater Financial Planning