Should you mix personal and business finances?

The benefits of an integrated financial picture

As a small business owner, you face many challenges and decisions. One of those is whether or not to co-mingle – or separate – your personal and business finances. Here are a few reasons why integration might be in your best interest.

While life’s journey might see you buy a home, raise a family, and eventually retire, you’ll also shepherd your business through a series of stages – start-up, expansion, maturity, and finally through to succession.

At each stage, you’ll have a unique set of circumstances to navigate, both professionally and personally. There will be tough decisions. Should you put profits back into the business or use them to pay off debt at home? How will leaving your business to one child affect the legacy you pass on to others?
One of the decisions you will face is whether or not to integrate your business finances with your personal finances. For many small business owners, there are practical reasons to consider this step.

Here are six ways having a balanced and integrated financial plan can pay off.

1. Reduce risk by building wealth outside your business

As a successful entrepreneur, you’re naturally inclined to reinvest profits back into the business. The problem is that too much of your net worth can wind up there.
Competitive and economic headwinds constantly challenge your company’s ability to create the income and wealth you’re counting on. A business is an illiquid asset. If you’re betting on its eventual sale to anchor your retirement, you could have difficulty finding a qualified buyer or you may be forced to settle for far less than you expected. That’s why it’s smart to build a complementary independent pool of savings through an RRSP, TFSA, non-registered accounts, or even a permanent life insurance policy.

Working with your advisor to create a diversified investment portfolio offers multiple advantages. First, your financial prospects won’t be solely tied to the fortunes of your business. An independent portfolio can also deliver a steady income to help sustain you and your family if your enterprise encounters tough times. What’s more, it adds another gear to your retirement savings by leveraging the growth potential of the broader capital markets.

2. Make smarter income choices

Most business owners find themselves tapping into their company’s earnings to fund personal and household expenses. In your case, is it better to draw income as salary or should you pay yourself a dividend?

But, taxes aren’t the only issue. Other factors can tip the scales one way or the other.

If you’ve prioritized building an RRSP for yourself or your spouse, wages qualify as earned income for purposes of calculating RRSP contribution room. Drawing a salary will also allow you to claim the Canada Employment Amount.

Dividends also have their upside. Receiving dividends instead of a salary excuses you from paying into the Canada Pension Plan, giving you the flexibility to invest dollars normally earmarked for CPP. There’s a convenience factor – tax on dividend income doesn’t have to be withheld at source and is frequently remitted.

Beyond your own earnings, your household income might include pensions, your spouse’s wages, rental income, and investment income – all could shape your optimal income strategy. Your business banking advisor can help you determine if salary, dividends, or a combination of the two, is best for you.

3. Capture more tax savings

It’s a good bet that one of your largest annual expenses is income tax. How well you navigate the tax rules can make a big difference to the profitability of your business and the growth of your personal wealth.

The good news is as a business owner you have additional tax-saving opportunities which aren’t available to the average person.

For example, you can set your salary level to generate the RRSP contribution you wish (within limits). If you’re early in your business venture and not yet incorporated, business losses may offset income earned elsewhere for tax purposes.

Want to limit your estate’s tax liability at death? Think about implementing an estate freeze to pass future capital gains from the business to family members. It’s one way to leverage the capital gains exemption available to business owners and family members holding qualified small business shares. Or, take advantage of “income sprinkling” to lower your household tax bill; this involves employing lower-earning family members or distributing dividend income to them. Check the Canada Revenue Agency website or speak with your business banking advisor and tax accountant for details.

When your advisor sees the full picture, they’re better able to orchestrate business and personal tax strategies to maximize tax efficiency – for you, your family, and your business.

4. Gain a 360-degree view of your insurance needs

Your insurance needs may start out simple enough, but that can quickly change.

Once you begin working, disability insurance is essential to help protect your income if you become sick or are injured. After you buy a home or have children, life insurance is there with a tax-free lump sum payment to provide for your family if you no longer can, while taking care of your mortgage and other debts. As you age, and health risks increase, specialized policies for critical illness and long-term care become serious considerations.

When you’re running a business, however, you need to take a broader view of risk.

Are there employees, managers, or partners whose absence, even for a short time, would negatively affect your operations? If so, buying key-person life or disability insurance to insure those individuals can make sense. Policy proceeds can help cover the costs of hiring a replacement. If necessary, they could also be used to fund a buy-sell agreement, providing liquidity needed to buy out a deceased shareholder’s interest rather than turning to a bank loan or savings.

The key is to have an advisor who has a 360-degree view of your insurance needs. This will help ensure you don’t wind up with excessive coverage in some places while leaving other areas exposed. Your advisor can also weigh elements such as your spouse’s group insurance coverage or help you decide whether it’s better to own life insurance personally or through your business.

The bottom line? If being improperly insured damages your business, there’s a good chance the consequences will spill over to your personal finances as well.

5. Put your experts on the same page

When you operate a business, you’ll have a team of experts you rely on to help you make decisions – lawyers, accountants, insurance specialists, other professionals. Still, if you can’t synthesize their advice into a coherent plan, you could miss opportunities, or worse, face costly mistakes, which could affect your personal finances too.
That’s where your BlueShore Financial advisor comes in. They can play quarterback to your team of experts, leveraging those disciplines to develop a co-ordinated game plan that brings together your business and personal goals, and keeps everything on track.

6. Align your exit strategy and retirement plans

When business owners are asked about the issues that keep them up at night, one of the top concerns is being able to retire from their business. Working closely with your advisor to create a succession plan for your business with your retirement goals in mind has advantages.

Timely adjustments can be made to your retirement plan if your exit strategy is affected by key events such as marriage, a serious illness, an adult child entering the business, or significant tax changes. Your advisor can also anticipate how incorporating the proceeds from selling your business into your retirement income might impact your tax rate, income-tested benefits like Old Age Security, or at what age you decide to begin receiving CPP.

When your succession and retirement plans are in sync, you boost your chances of leaving your business on your own terms for a financially-secure future.

The value of advice

When you’re running a business, financial planning can get complicated. At BlueShore Financial, we’re here to help make everything clearer.

Whether you’re looking to improve your business’ cash flow, save tax, manage risk or secure your retirement, our holistic approach to financial planning incorporates your personal and business goals. In our role as a key financial partner, we’ll help you stay on target as your life and business move forward.

Gain the peace of mind that comes with having the right advice. Contact your BlueShore Financial advisor today for a comprehensive review.