Small business owners often limit their potential for financial success through lack of awareness and careful planning, says Jennifer Black, president of Dedicated Financial Solutions, a financial planning company based in Mississauga, Ont.
“Many small business owners are unaware of some fairly common financial pitfalls, or discover them too late,” she says. “This can incur needless expense or cause other significant problems that could have been avoided with some sound advice and advance planning.”
Black, an award-winning advisor and certified financial planner, has identified five common pitfalls that face Canadian small business owners, and offers advice on how to avoid them.
1. Be aware of the capital gains exemption. For 2014, the Lifetime Capital Gains Exemption increased to $800,000. Are your shares eligible? The exemption creates additional opportunities in tax planning, but business owners should consult their tax advisor to ensure their shares are eligible before attempting to use the exemption.
2. Protect your business through succession planning. Many businesses have no succession plan in place should one of the owners die, retire, or leave the business. By planning for the loss of an owner in advance, all partners can decide whether the remaining owners can wrap up the business, sell their own interest, allow heirs to take over owners’ shares, buy them out, or use other options. Formalizing these decisions upfront in a buy/sell agreement will give owners peace of mind and ensure a smooth ownership transition.
3. Avoid double taxation of your business. Business owners can avoid double taxation on their estate after death through a comprehensive Estate Plan. “Your shares are deemed to be disposed of upon death, and your estate will have to report the capital gain on your final tax return,” explains Black. “There are three ways to address the problem of double taxation, so be sure to meet with your tax advisor and accountant to go over this aspect of your Estate Plan and choose the approach that’s right for you and your business.”
4. Don’t neglect your personal wealth management. Successful business owners are typically high-net-worth individuals with personal financial needs that can be more complex than those of the average investor. They also have little time on their hands, and frequently, their personal financial planning suffers as a result, says Black. “Some business owners focus on their company, then devote limited attention to their personal finances. Some even try to manage their own finances with a do-it-yourself approach. The need for protection through insurance, minimizing personal taxation, retirement planning, possibly trust funds for children and grandchildren, and managing investments, requires a well-qualified wealth management consultant who specializes in high-net-worth individuals.”
5. One size does not fit all. Whether it’s a business plan or personal wealth management, your plan needs to be tailored specifically for your unique situation and goals. What’s right for one company doesn’t necessarily mean it’s a good fit for you and your business. Your financial plan also needs to consider your personal investment timelines, and should be revisited regularly to ensure that changing needs and goals are still reflected properly.
“Through careful financial planning, small business owners can steer clear of many of the financial pitfalls that can impact their bottom line,” says Black.
Jennifer Black is the president and co-owner of Dedicated Financial Solutions.
