A common problem clients come to us with is not knowing what to do with the extra cash sitting in their corporation.
Although having extra cash built up inside your corporation is great, you miss out on opportunities to grow your wealth when it’s just sitting there.
What Should You Do With the Extra Cash Sitting In Your Corporation?
We often encourage business owners to leave as much money as possible in their corporation and only withdraw what they need to live off of. However, the money left inside the corporation should not be left sitting there; you need to invest it.
Not knowing how to invest it properly leads many business owners to make one of two mistakes.
The first mistake is doing nothing and simply letting the cash sit in their corporation. You would essentially be losing money because of inflation. The other mistake they make is taking cash out of their company to invest it personally. By withdrawing and investing it personally, you end up paying an extra layer of personal tax.
(Here are 12 investment planning FAQs to help you make smarter decisions)
Let’s get into four ways you can properly invest the excess cash inside your corporation.
What to Invest Your Extra Cash In?
1. Investing in real estate
Real estate is a good choice because when you sell the property, only half of the gains will be taxed. The other half can be paid out to you tax-free via the Capital Dividend Account. There’s also an opportunity for a passive income stream from the rental income.
(Looking to make the most of your investment property? Here are three tips)
2. Investing in stocks or corporate-class funds
Open a corporate investment account to invest in stocks and corporate-class funds. One benefit of investing inside your corporation is the low corporate tax rates. Without having to pay the layer of personal tax if you invested personally, you now have more money to use when investing. Similar to investing in real estate, you can withdraw half of the gains from stocks and corporate class funds tax-free using the Capital Dividend Account.
3. Investing in corporately-owned whole life insurance
Corporately-owned whole life insurance is suitable for business owners looking for a way to grow their money tax-deferred. You’re able to lower your tax bills now, during retirement, and at death.
4. Investing back into your business
Reinvesting money into your business is a decision you don’t want to overlook. Keep your business goals in mind when choosing where to spend this money.
This could be growing your team, investing in new systems and infrastructure, or building out your brand. Business owners are often hesitant because they’re not able to see an immediate tangible return on that investment, unlike investing in the stock market or real estate, where you can see your growth and earnings. But later down the road, you’ll notice the long-term impact and success it rewards.
3 Considerations Before Deciding What to Invest In
Before deciding what to invest in, there are three areas you want to get clear on first:
- When will you need the cash you’re investing?
- What goal are you investing towards?
- Should you have a holding company to set up your investments?
Reevaluating your time horizon, risk tolerance, and financial goals is a great place to start. When you gain clarity on these questions, it’s much easier to make an investment choice. For example, your investment strategy will differ if you’re looking to buy a house in the next couple of years vs. planning for your perfect life in retirement.
A holding company should be considered for liability and tax planning purposes. Adding a holding company to your corporate structure can offer flexibility in the strategies you can use to save tax.
If you’re feeling unsure, we advise you to lean on a professional and get the guidance you need to help make the best decisions.
Book a call for innovative financial strategies to grow your wealth and lower your tax bill.