Generally speaking, it is a good idea for people to personally invest in stocks. If you do it for a long time, you’ll eventually build fantastic wealth. Over 30 years, even people on modest incomes can earn a fortune.
Naturally, many business owners wonder whether they should do the same with their companies. Should they invest in stocks via their company accounts?
At first blush, it seems like a sensible thing to do. Instead of using surplus funds and plowing them right back into the business, you’re diversifying and spreading risk. But as the owner, does a strategy like that really make sense?
Companies are cash flow machines
Generally, business owners should view their companies as cash flow machines. They’re systems that generate money reliably every year.
For that reason alone, it is a good idea to view them as separate from your portfolio. In fact, you should see them as a form of diversification – something that you’re doing to become more sure of having high wealth in the future.
If you need to invest in the company, then by all means keep the cash on the firm’s balance sheet. Then use it to buy the things that you need in the future, such as new staff, equipment and premises.
If the company has too much cash, most owners then remove it from the company. If there are no opportunities for productive investment, then the capital is better applied elsewhere. Owners typically draw it out, distribute it among the shareholders, and then put it into other funds, companies or assets.
Can you invest in stocks through a company?
Companies with brokerage authority can buy and sell shares on the trading floor under their own steam. Firms in this position are generally financial and wealth management companies themselves. They take client money and then carry out their buy and sell orders, according to their instructions. Thus, they are financial intermediaries who profit by charging transaction fees for their services.
Companies that don’t have this authority can still buy shares: they just have to register with brokers as “institutional investors.” There are many good examples of this. For instance, universities are essentially glorified hedge funds. They take in cash from students and donations and then invest it via brokers in a variety of stocks and shares to increase their long-term wealth.
Some big businesses and charities do this too. They view it as a way to reduce their tax bill while expanding their balance sheet, even if there are no on-the-ground operational opportunities for doing so.
If you set up a C-corporation, it gives you full ability to buy stocks and shares from the market on your own terms. Many foreign owners choose this business structure, even though it has double-tax arrangements. (You pay tax on your company income and the personal income you draw from it).
With a C-corp, you can invest in other companies. So if you have excess cash and there are no opportunities to use it for your current operations, you can put it into other businesses. Once you become a shareholder, you can access the rights to the firm’s future profits.
If you run an S-corporation, you have the same right to buy and sell stocks as an individual investor. However, you need to be a little careful when it comes to taking profits from dividends. Accountants will be able to process these for you.
Limited Liability Companies
Limited liability companies are a good way to reduce taxes because they avoid double taxation rules. What’s more, they provide a legal structure that allows the partners and directors to pool their resources and distribute them according to a legal charter.
In this way, LLCs make it possible to construct large stock portfolios relatively quickly. Investors can organize their company assets and then keep a record of all the investments that the firm makes.
In all the above scenarios, it is critical to avoid mixing personal and business finances. Doing so creates accounting ambiguities and may subject you to more tax.
In practical terms, this means buying stocks and shares from your business account (or transferring the funds for them from your business account to your institutional investor brokerage account).
Work with a qualified accountant who understands how to process dividend earnings, since these can be substantial for firms that invest.