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When you own a small business, it's all about income. A classic shop or store may have profits from sales or service. A startup may have venture capital money coming in. In either case, you might need to get a little more creative with your revenue streams. Individuals and investment funds can make money off the stock market, so why not your small business?
But before you start day trading with company funds, here's what you need to know about your small business investing in stocks.
Just because you can invest in stocks doesn't mean you should invest in stocks. Most small business owners and entrepreneurs are already focused on the company's day-to-day operations and don't have time to keep an eye on the market, much less execute a high number of stock trades. You're probably trying to simplify things, and the last thing your small business needs is a day-trading distraction.
But you don't have to pick and choose your stocks one at a time. You can also invest in an index fund that includes groups of stocks and is designed to mirror the stock market's performance as a whole. These can be less risky and require less maintenance over time.
Before you begin, consider the legal and tax implications of investing based on your business's structure.
Most businesses register as legal entities through state regulatory authorities. With so many different entity types for owners to choose from, there are certain considerations you should take into account before investing through a business structure:
If your small business is incorporated as an S-corporation (S-corp), there are no more legal restrictions on stock purchases than placed on an individual. So most small businesses can buy and sell stock the same way a normal person does. You may need to pay more attention to how your small business will be taxed on any profits you make from dividends or stock sales.
As The Arizona Republic points out:
You may wonder since there's no tax at the corporate level in an S corporation, if you can sell the stock in the corporation and defer taxes on it for as long as you hold it in the corporation. Unfortunately, you can't. The moment you sell the stock, the profit on the sale flows out of the S corporation to you and becomes taxable income.
So, if you're going to play the market with company money, make sure you have a qualified tax attorney on your side to keep it all legal.
C-corporations (C-corps) are typically larger entities with complex regulations. They can have unlimited investors and can sell shares of stock publicly. Owners of C-corps are subject to what's referred to as a double tax. This means that any profits are taxed at the corporate level and again at a personal level when the owners file their annual tax returns.
Despite the double tax, investing in businesses through a C-corp can still be highly lucrative under the right circumstances. C-corps that invest in foreign businesses are entitled to certain benefits that reduce taxes paid on the profits from those investments. Here, the corporation pays what's called a Global Intangible Low-Taxed Income (GILTI) tax. This tax ranges between 10.5-13.5%, much lower than the typical 21% federal corporate tax rate.
Limited liability companies (LLCs) can be a great way to reduce an owner's tax liability. That's because LLCs can choose to be taxed like S-corps, thus avoiding the double tax. Additionally, multi-member LLCs allow owners to pool their investment capital together according to the terms of their operating agreement.
LLCs are simple to establish and are a go-to for startups looking for a quick and easy path to liability protection. For this reason, investment experts often recommend that partners organize as an LLC before pooling their monies for investment. It would be best to keep a diligent record of all investments made through the LLC. Additionally, pay careful attention so as to not commingle your personal and business assets. Doing so could potentially remove the liability shield afforded through LLCs.
LLCs (and their close relative, limited liability partnerships) protect owners' personal assets from the debts and obligations raised by the company. These protections extend to debts and losses raised through investments.
Alternatively, general partnerships and sole proprietorships offer no such protections. As such, it is not generally encouraged to purchase stock or make investments through these entities. Instead, owners should register their entities as LLCs or corporations before investing through the business. This can be done at any point during the life of a partnership or sole proprietorship.
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.