Owning a small business can be an effective way to achieve financial independence, but one challenge is that it often makes it harder to diversify your investments since so much of your wealth can stay tied up into your business.

Having an investment strategy for extra funds, when they are not needed for business operations, can help you better navigate the future, for both you and your business. Here are some tips for how to build an investment strategy for yourself as a business owner.

Getting Started

Having a clear understanding of how much of your working capital and cash flow you need in your cash reserves and how much you can allocate towards investments will help you make the most of your assets as a foundation to securing your future. This is a great time to also review your business plan, taking into consideration your long- term vision for your business as well as your own future beyond the business.  

Growth investments

Consider focusing on investing funds for capital growth. It’s a strategy  that many professionals, like lawyers and doctors, have historically done as a form of retirement, wealth management, and tax planning. The benefits of these small business investment strategies can extend to other types of business owners and entrepreneurs as well.

You can use funds to invest in self-managed portfolios or professionally managed investment portfolios through which you can buy mutual funds, bonds, exchange-traded funds (ETFs), individual stocks, index funds, and other types of investments.

Tip: In 2019, the federal government changed the tax code to increase taxes on incorporated companies making over $50,000 a year in passive investment earnings. 

The small business deduction, which typically reduces the tax rate on the first $500,000 in active business income, reduces the $500,000 cut-off of the deduction for companies that earn more than the $50,000 allowed. For every dollar earned over $50,000, the $500,000 cut off is reduced by $5.  

Contribute to a retirement plan

If you are paying yourself in a salary rather than via dividends from your small business, consider maxing out the amount you can contribute to your retirement savings. As a business owner, you can contribute up to 18% a year of your income towards your retirement plans. With funds allocated to your RRSPs investment account, look to diversify outside of your own industry.

For example, real estate agents buying real estate related stocks could leave them overexposed to the property market if it faces a downturn. We recommend working with an advisor who is experienced with investment strategies for small business owners and who can help you make the most of your allocation strategies to balance your exposure to various industries.

Invest in yourself

Even if you're maxing out your RRSP every year, you still might want to consider whether you're investing in your future in the most effective way. Many business owners have a significant percentage of their investments tied up in their business. Look to balance that with your own personal savings, TFSAs, non-registered accounts, and life insurance plans outside of your  business.

Unsure if you have the right balance? That's where the experts come in. Professionals like a financial advisor, wealth manager, accountant, and tax lawyer will help you come up with a plan to maximize your personal savings and investments while also ensuring you have the cash flow you need in your business.

Invest in corporate-held life insurance

If you have a significant amount of money to invest and are anticipating surpassing the $50,000 small business tax cut off for investments, one option to consider is purchasing corporate-held permanent life insurance.

While the policy will have a death benefit, it will also have an investment portion where funds can grow tax-free and exempt from the $50,000 investment cut off. Your business can use those funds as collateral for a future loan, borrow against them through a policy loan, or cash them out by surrendering the policy in the future.

Purchase real estate

Another way to diversify your investments is to purchase real estate. Whether you are planning to purchase a commercial real estate property to ru your business out of, or purchasing a rental or investment property, real estate can be a great way to build wealth over time.

As with most real estate investments, they can be expensive, and means that your small business might then be only diversified in two industries. Also, property might require financing to purchase, meaning you could need to take on debt.

Real estate investment opportunities have different tax implications, depending on what kind of investments they are. If you are purchasing a plant for your business's operations that will count towards your general small business expenses. Alternatively, if you are purchasing a rental property it would count towards your $50,000 passive investment cut-off.

Some business owners choose to create a separate holding company for real estate investments to protect them from the risks of owning property, including liabilities from debts and judgements related to injuries on a property.

Work with an advisor

When it comes to planning out your investment strategies, the best ones often involve a variety of approaches. These can help build wealth and security in ways that are right for both your business and you since they fit with your risk tolerance and future personal and business financial goals.

Working with experts, including an experienced advisor, financial planner, and tax professional is often the best way to help you understand your options and come up with a plan that works for you. They can ensure you're taking advantage of all the opportunities available and making investments that are right for you and your business.

Ready to grow your business or just want to get started? Come in and have a conversation with our Scotia advisors to take your business to the next level