By JoAnne Sommers
For most small business owners, running a business is an all-consuming undertaking. There are so many things to take care of – from attracting new customers to managing day-to-day operations – that it’s easy to neglect business planning.
Even so, it’s essential for small business owners to prioritize business planning matters for periodic review. A meeting to brainstorm with your professional advisors – accountant, lawyer and money manager – can provide a lot of insight, says Adrian Mastracci, portfolio manager and financial advisor at KCM Wealth Management in Vancouver. “Contemplating business matters is best done as a unit,” he says. “Review all of the implications and design a total approach to addressing your priorities.”
Here is a look at some of the leading planning priorities for Canadian small business owners:
• Business Structure
It may be time to give your business structure a tweak or even a makeover, says Mastracci. The current structure may consist of a sole proprietorship, partnership, incorporated company, or it may be a more complex set of holding companies.
Choosing the right legal structure for your business can save you money at tax time, make it easier (and cheaper) to pay yourself, help you avoid potential personal legal liability, and allow you to sell your business or pass it on to your heirs, according to RBC Royal Bank.
Your first step is to evaluate the valid business reasons for the current structure. Then think about whether you could benefit by modifying part or all of the structure.
• Owner Remuneration
Take a look at the composition of your current owner remuneration mix to make sure it’s serving you well, advises Mastracci.
“Most business owners take a combination of salary, bonus and management fees, which is deductible by the business but taxable in the hands of the recipient,” he says. “Determine who is getting paid and how much.”
Some members of your family may be able to receive dividends while paying little income tax, he adds. Do a tax projection to determine whether a shareholder would pay less tax by taking a dividend as opposed to salary remuneration.
Also keep in mind that in order to create the maximum 2015 registered retirement savings plan (RRSP) contribution room of $24,930, you will require “earned income” of close to $138,500 in 2014. And don’t forget that “net rental income” qualifies as earned income. Rental losses, however, reduce earned income.
• Business Continuance
When you’re in the midst of your normal business activities, it’s easy to forget about the question of how to ensure the continued operation of your business if something happens to you: specifically, who will take the reins if you become disabled, ill or deceased?
Mastracci recommends that you arrange for someone who can step in and fill your shoes temporarily and, perhaps, for the longer term, if necessary. If you’re fortunate, there may be a family member or someone already in the organization who can fill this role.
Once you identify your replacement, make sure to let the other senior people in the organization know who you’ve chosen for this purpose.
• Family Trusts
Many business owners have set up various family trusts over the years. Some of the rules governing them have changed and some trusts are now approaching their 21-year life. At that point, a trust’s property is deemed to be sold so it is possible that tax will be incurred on any capital gains.
Trusts can be advantageous when adult children are the beneficiaries. While minors are prohibited from receiving income from a trust, there is no prohibition against an adult child doing so. Thus a trust can be a good vehicle for passing some of the value of the business on to your adult children.
This is a good opportunity to revisit your family’s planning needs and the cost versus benefit of your current trust structure. If you have a family trust, ensure that the documentation and trust arrangements are up to date. This is especially important if the trust was created in another province where you no longer reside.
This is also a good time for those who don’t have a family trust to assess whether it makes sense to establish one.
• Lifetime Capital Gain Exemption
A lifetime capital gains exemption of up to $800,000 per spouse is available in 2014, up from $750,000 in 2013. It exempts gains from the sale of qualifying small businesses, farm property and fishing assets. You should review the eligibility steps for the special gain if you own such assets. Full exemption means a tax savings of almost $163,000 per spouse in many provinces.
Addressing these business issues will help to pave a smoother path to achieving your financial goals, says Mastracci, adding, “Always ensure that you and your professional advisors are on the same page.”