5 Financial Pitfalls That Small Business Owners Face

Small business owners often struggle to allocate enough time towards careful financial planning and research, which can lead to missed tax savings opportunities and inefficient transition preparation. What’s most unfortunate is that small business owners typically incur these needless expenses and financial pitfalls that could have been avoided with some sound advice and advance planning from a tax or wealth advisor. Here, I outline a few financial drawbacks that small business owners are at risk of.

1. Omitting significant tax exemption. If you disposed of qualified small business corporation shares, you may be eligible for lifetime capital gains exemption for just over $800, 000. The lifetime capital gains exemption creates additional tax savings opportunities – it creates a 50% deduction of your cumulative capital gains as you only include one half of the capital gains from these assets in your taxable income. For your shares to qualify, your shares must check the following boxes (however, you should consult a tax advisor before attempting to use the exemption):

• All or substantially all of the company’s assets must be used in an active business carried within primarily Canada.

• The disposed shares must have been owned by the shareholder or a related person for the 24-month period prior to the disposition.

2. Failing to plan for business succession. Many small business owners have no transition plan should one of the owners pass, retire or leave the company. A transition can happen suddenly and failing to plan for your succession can lead to significant lost company value. Your retirement plan needs to work in conjunction with the company’s plans. For example, if you want to retire in 2 years but the company requires your involvement for at least another 10 years, your succession will not run smoothly. Think about the type of buyer you might sell to; your children or other family members, an executive, or an outside buyer. Each buyer will influence the company’s selling price and your future role with the company.

3. Incurring double taxation at death. When a taxpayer dies, the person is deemed to dispose of the capital assets they owned immediately before death. Thus, their estate will have to report the capital gains on their final tax return. If the capital assets are shares of a corporation, tax is often payable a second time upon being distributed; so, we can see the issue of double taxation. There are many estate planning tools that address and aim to reduce the effects of double taxation. Speak with a wealth advisor to choose the best approach for you and your business.

4. Neglecting to protect your personal wealth. As an entrepreneur and business owner, your company may hold most or all of your retirement benefits. Your personal financial and estate plan will be completely different from that of an executive for example. With a demanding work schedule, you may need to rely on outside financial professionals to help you plan for long-term financial goals and protect your family in the event of death or disability. This can involve insurance plans, retirement planning, minimizing your personal taxation, possible trusts for your spouse and children, and liquidity of assets.

5. Assuming one size fits all. Your risk aversion, investment timelines, and plans for retirement will be different from another company or individual. So should your financial plan. Find the right wealth advisor for you, who can help to: create a financial plan to ensure that your retirement is planned and managed for, find a professional to conduct a business valuation, help you to determine your exit strategy, give you referrals for other essential professionals (an attorney, accountant and so on).

---