PERSONAL PLANNING FOR BUSINESS PEOPLE
a number of ideas for this article were taken from “Personal Financial
Planning” by Ed Vos)
Self employed business owners face a number of unique problems, situations and opportunities, in their personal financial planning. Typically, the business is their main investment, they have most of their capital invested in it and it is their major or sole source of income.
There are a number of risks which
business owners are exposed to, such as personally guaranteed debt, commercial
problems and legal problems. In
addition to these risks there are additional risks in areas of commercial law
and in particular the new Companies Act, which significantly increases the
personal liability facing company directors.
Because of the many possible arrangements that can exist within a business, many business owners can organise their affairs to achieve an advantageous income tax situation. This could include:
How to carry out certain transactions to obtain maximum tax benefit
|The structure to use for the business activity|
Insurance can be used by the business in order to protect the individual in a number of areas:
On plant, equipment, buildings
|Debt repayment, especially when personal guarantees are given|
|Keyperson (to cover loss of profits)|
|Capital fund for family income|
|Life and disability|
FINANCIAL PLANNING ISSUES
Privately owned businesses are often
faced with significant cashflow constraints, making it difficult for a business
owner to find cash and capital to diversify their investments outside the
is not necessarily the best investment strategy for a business owner. If a business owner has a successful track record and a
successful business, there is a strong argument that the best strategy is to
continue to put all eggs in one basket.
The diversification argument does hold some water, however, when business
owners seek to make investments outside of the business.
The asset protection concept operates on these levels:
In many cases business owners offer their personal homes as security for loans, to obtain a lower interest rate, as opposed to business assets. There should be a significant benefit to justify putting a family home at risk, although for some businesses there may be no other available security and thus no choice.
Business assets may be owned by a different entity than the main trading entity where they are exposed to significant risks
The use of alternative structures such as family trusts to hold assets otherwise held by the individual
Another method which is sometimes employed is for a husband and wife to each hold different assets. If one person is not involved in the business, that person can hold assets such as the family home. The businessperson can hold the “risky” assets such as the business.
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