The unique needs of small business owners
The main reason people go into business for themselves is quite simple – to have more control. For others, wealth creation is the main focus, although small business also brings with it the higher chance of failure and loss. Is the hard work and extra risk worth it?
If you are a small business owner or have dreams of becoming one, consider the following and how it might apply to you.
Earn less now to create future wealth
Research suggests that the average Australian small business owner works in excess of 35 hours per week – much more than their employed counterparts of similar age – but despite these hours, small business owners have lower levels of income.
On the upside is although they earn less, small business owners, on average, have a higher net worth than employed people of a similar age and gender. They invest the same way - in homes and superannuation, with the latter being much lower for small business owners than their employed counterparts. The reason for this is simple - given the choice, many small business owners prefer to use surplus funds to grow their business with the expectation that its eventual sale willfund their retirement.
Protecting their investment
It’s common for small business owners to use their home as security for business borrowings – a requirement of many lenders that want to ensure the owner has a vested interest in the success of the business. Managing the associated risk is imperative. For example, life insurance can be used to protect the income, home and other personal assets in case the business owner dies or is unable to work.
Another area that is often overlooked by small business owners is the need for key person and business overheads insurance. These policies are designed to protect the business rather than the personal position of the owner. If the business can continue to meet its commitments, the corresponding personal risk to the owner is reduced.
The importance of superannuation
Superannuation has an important role to play as a tax-effective method of saving for retirement. It also provides a degree of asset protection in the case of bankruptcy. The transition to retirement pension provisions can provide opportunities for owners older than 55 who sell their business and contract back their services to the new owner.
If controlling investments is an issue, a self-managed superannuation fund may be more appropriate. Special rules applying to the acquisition and leasing of real business property can also be advantageous.
When it comes time to sell
With fewer than one in three business owners having a succession plan, most of these entrepreneurs don’t plan well for the future and with around 1.2 million Australian small businesses having no employees, the owner IS the business. This limits the value of the business as a saleable asset, meaning that when the time comes, many owners will struggle to extract the value of the equity they’ve built up in the business.
For owners who do sell their business, the correct use of the small business capital gains tax (CGT) concessions, for example, can significantly reduce a potential tax liability.
Don’t do it alone
A key characteristic of the small business owner is their ability to rely on themselves, however there is a time for specialist advice. The team at Stature Accounting has the knowledge and skills to help with matters such as business structuring, ownership strategies for personal assets, and the correct insurances. Give us a call on 02 8256 2100 to help ensure your life’s work meets all of your life’s needs.
Sources:
NATSEM (2011), AMP/NATSEM Income and Wealth Report Issue 11, There’s No Business Like Small Business, July 2005
Australian Bureau of Statistics (2011), Catalogue 8165.0 - Counts of Australian Businesses, including Entries and Exits, Jun 2007 to Jun 2009. Published 21 December 2011. www.abs.gov.au
