What is your strategy for keeping money in the business or taking out and investing?

I'm curious how you see the current economic climate vs the opportunities for doing business.

Do you feel confident in keeping money in your business and going for corp taxed growth or do you withdraw and take the income tax/paying into retirement funds.

I understand there is no clear answer and it depends on your business, but what are you general concerns?
 

EndlessGravity

Kingfisher
Given the economic and financial instability we've recently seen and the big risk of more of it, I recommend building business savings of at least 6 months. You still run the risk of having to walk away from everything after getting bled dry but if you're committed it gives you a realistic cushion. It also places you ahead of 90% of other businesses.

I would hold off on any expansions or business asset purchases.

Few small business owners have retirement funds, so I think that's a moot point.
 

TheMaleBrain

Kingfisher
Gold Member
There is a concept call "FU Fund".
This is what @EndlessGravity is referring to.

Basically it comes down to a simple question:
Where do you get more benefit from?
If it's the business (it grows and maybe creates dividend)- than keep it there.
If not - make sure taxes don't hurt you.
Other option - use the business to invest (meaning that the "business" invests)
 

paninaro

Kingfisher
After setting aside enough of a cash cushion, for the remainder it's a matter of looking at the return on that capital from running your business compared to investment opportunities open to everyone.

Let's take a simple case like you have a lawnmowing business, and you're current constraint is you don't have enough lawnmowers. If you put $10k into new equipment, leading to more revenue and profits, you'd probably make a tidy return on that investment like 20-30%. Meanwhile, if you put that same $10k into the general stock market, you may see annualized returns of 10%. (There's also the effect of leverage and weighted average cost of capital, but trying to keep it simple.)

The other side to it is let's say you have $10k and you plan to invest it in the stock market, and not sure whether to invest it through your business or your personal account. Taxes are the big consideration, but a lot of tax benefits, especially if you plan to hold the money long-term, are for personal tax situations not business tax situations. For example, you could invest via a Roth IRA (or backdoor Roth IRA if your income it otherwise too high) and then all growth is tax-free. Same with a 529 for education spending -- most states give a tax benefit when you put money in, the growth is tax-free. You can use it to pay for private school at the K-12 level or higher education. On the business side, you could set up a 401k for yourself and have your company match your pre-tax contributions.

A lot of these tax-efficient strategies have limits on how much you can invest per year, so you could just max out the personal options, then do the remainder within the company.
 

TheMaleBrain

Kingfisher
Gold Member
Let's take a simple case like you have a lawnmowing business, and you're current constraint is you don't have enough lawnmowers. If you put $10k into new equipment, leading to more revenue and profits, you'd probably make a tidy return on that investment like 20-30%. Meanwhile, if you put that same $10k into the general stock market, you may see annualized returns of 10%. (There's also the effect of leverage and weighted average cost of capital, but trying to keep it simple.)
Sign me up for 10% return on my investments, or 20-30% on business investments.
That would be AWESOME
 

paninaro

Kingfisher
Sign me up for 10% return on my investments, or 20-30% on business investments.
That would be AWESOME

I was using examples, but you can just buy an S&P 500 index fund. Historic returns average about 8%/year.

If your own business isn't making at least that on invested capital, then it's more efficient to just shut it down and put the money in the S&P 500 (for example).
 

TheMaleBrain

Kingfisher
Gold Member
I was using examples, but you can just buy an S&P 500 index fund. Historic returns average about 8%/year.

If your own business isn't making at least that on invested capital, then it's more efficient to just shut it down and put the money in the S&P 500 (for example).
I hear you.
But I need to do stuff and love to get paid when I do it.
Drop me a PM and let's see. Maybe I'm doing something wrong
 
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