Corporate investing is putting the surplus cash of a business to use.
There is no need to put the cash in the bank and let it lie idle, it can be put into investment and generate revenue. This can be a good way of reducing tax obligations.
Below is a little more information about corporate investing.
What is it?
This is investing surplus cash/ the profits of a business over recording it as income or leaving it in the bank accounts. This is also a good way of withdrawing money in a tax-efficient manner, it isn’t used as income.
The owner can decide to pay themselves through salary or in dividends, but most avoid doing this because taking the money out of the business and putting it in account results in a high tax bill.
Leaving the money to rest in the company account is not a good idea because the money isn’t working for the company. That’s exactly why profits are doubling down on high-quality companies.
It can be a good idea to withdraw the money and then put it into carefully considered investments. There are times when it is not appropriate to distribute the money to shareholders or re-invest it into the business, which makes corporate investment a good option.
The advantages of corporate investing
The corporation tax, which applies to the profits made by a business on any investment has gone down from 28% in 2010/11 to 19% today.
This rate is scheduled to go up to 25% in 2023 unless it is a small company. This is encouraging for businesses because it means they can now invest their profits and end up with more.
Instead of directing the excess profits to tax-efficient vehicles such as pensions, they can now invest in different ways and not stress too much about high tax bills.
Other points include;
Your business has multiple revenue streams when you diversify into other assets and securities
It can generate more money for your business which can be reinvested
Your surplus cash has a chance of growing instead of leaving it in a savings account with a very low-interest rate.
The disadvantages of corporate investing
There is a chance of losing money, which is like any other investment. There are some who have lost all their money, but this is an extreme scenario. There is a risk of losing money even if you only choose historically stable securities and assets because of market crashes.
You need to make sure you look at the risks before you invest. There is a risk that comes with running a company, so many owners and CEOs have a good understanding of risk tolerance.
Corporate investing isn’t a great option when you need instant access to boost your cash flow. Maybe you are running a business that is seasonal or one without a steady and consistent income stream.
This means it isn’t ideal to type up your surplus cash. If you are worried about cash flow, it isn’t advised to lock away investment for too long.
Which investment vehicles should you invest in?
The right investment vehicles vary because it is heavily influenced by factors like;
How hands-on do you want to be with the investments?
How long do you want to invest for?
The sectors do you want to invest in?
The returns you are after?
Whether you are going to look at alternative investments or you are only going to focus on basic financial instruments.
Below are some of the most popular options:
Funds – There are a lot of options like mutual funds (it lets you invest in bonds or portfolios, stocks, and securities) and sector-specific vehicles e.g., real estate funds.
Trusts – This is where investors pool money and then the money is used to invest broadly in a given sector of the market.
Pensions – A tax-efficient way to invest is making employer pension contributions, but this means you cannot access the funds till you reach 55 years.
Individual stocks – You can invest in a number of companies or just a company if you see they have a bright future.
Bonds – Government bonds have become popular because they are seen as a safe investment, but you can have a look at corporate bonds because they offer higher returns.
Commodities – Tangible products, like oil, precious metals, and gold.
Tax considerations when it comes to corporate investing
Corporate tax obligations vary a lot because it is going to depend on the size of the business according to Hub Agency. The size of your business is going to determine your tax obligations, which makes it important to research more and know more about your tax.
If you are a micro-entity, then you will be required to pay taxes on investments when they are realized – sold on or surrendered at least in part.
If it is a small company, you are going to be taxed on any ‘basic financial instrument’ (such as shares, stocks, options, bonds, and futures contractors) when the investment is realized. You need to declare other investments like commodities e.g. oil or gold on your annual tax return.
It is important to know which investment is going to push you over the capital gains tax threshold. You need to find out the capital gains tax threshold when investing because it is going to come in handy.
If you are considering estate planning as you make your corporate investment, then you have to find out if you qualify for business property relief. This is going to let the business-related assets be passed to the beneficiaries tax-free after two years.
Do you need professional help before and when investing?
As mentioned above, corporate investing provides companies with a way of minimizing their excessive tax.
The process can be a little complicated. If you are interested in maximizing your tax efficiency on investments and holding onto as many liquid profits as possible, it might be best to talk to a professional accountant. They are going to help with working out the tax you have to pay on your profits and revenue.
If you aren’t well versed with investments, then you need to look for professionals to advise you before you get started. You shouldn’t try to do things yourself because you will be exposing yourself to a lot of risks.
An independent financial adviser is a good investment because they can help with gauging your appetite for risk, how much you are willing to lose on your investment, and how long you are ready to tie your money up. They have to look at a lot of factors and then offer impartial advice.
You should look for a financial adviser who has specialized in advising business owners on corporate investment because they will help a lot. You can also talk to your accountant for advice.