As the owner of a small business, there are many different ways you can earn profits from your company, one of which is investing in stocks as a business. If you are interested in investing as a small company, make sure you are aware of the risks associated with it. Here are some important considerations to take into account before starting to invest.
Some Considerations Before Buying
“The first thing a company should consider when investing is “why”, said Ken Alozie, general manager of Greenwood Capital Advisors, in an email to The Balance. He stated that the business owner should ask themselves how this investment helps achieve business goals. They should also consider liquidity needs for the business and the time frame and risk tolerance related to market volatility. Answers to these questions can help business owners choose the best investment for their situation.”
Make sure you are aware of your personal and company financial situation before committing to new investments. Small business owners are already experiencing time pressures, and some investments can be not only high-risk but also distracting and time-consuming. “There is no benefit in investing in something you don’t know”, explained Diana Martinez, a certified advisor at SCORE, in an email to The Balance. She said that if business owners lack knowledge, they should ensure they can spend the time to understand and manage their investment portfolio, rather than just relying on their financial advisor.
Investment Options and Different Business Structures
If you choose to invest as a small business, your options will vary depending on the type of business. Regulations and taxes related to business investments can be complex, so before starting, it is important to talk with a qualified financial advisor and your accountant.
Here are some things to consider, depending on your company’s structure:
Partnerships and Sole Proprietorships
Partnership accounts are not taxed themselves; taxes are applied to each partner and reflect in personal income tax returns. Similarly, in the case of sole proprietorship, the business owner and the business itself are treated as one unit for tax and liability purposes.
Limited Liability Companies
Limited liability accounts receive some of the same benefits as partnership accounts, as well as corporations. Limited liability companies are treated as pass-through entities for tax purposes, and they also have limited personal liability like corporations. The liability of the owner and their company is restricted solely to the investment.
Corporations
Corporations can acquire assets, enter into contracts, sue others or be sued, and are taxed as a legal entity.
How to Invest in Stocks Through Your Company
If you are a small business owner looking to invest, the process will be similar to how individuals invest. If your company is legally recognized, you can own an investment account as a business entity. You will need to comply with the regulations and taxes related to your situation, so make sure to discuss your options and requirements with a financial advisor and accountant.
Your investments as a company will depend on the time and effort you are willing to commit, as well as your risk tolerance. You can start by investing in some stocks – if you do it yourself, you can avoid fees and start with a small amount, which is what SCORE advisor Martinez suggested.
If you prefer a professional to manage your portfolio, you will be charged fees, and you are expected to have a higher initial investment amount. Martinez warned that if you invest in stocks for trading, only use money you can afford to lose, and be aware that you may pay for learning experiences at the beginning.
Alternatives to Investing in Stocks Through Your Company
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Certified SCORE consultant Hal Shelton shared various suggestions via email with The Balance for small business owners who do not know much about investing in stocks or bonds:
- Hire a professional to manage the business investments.
- Choose to invest in individual non-callable bonds and hold until maturity, or in stock indices.
- Consider the long term of three to five years.
Investment alternatives to stocks include index funds and ETFs, which provide broad market exposure at a low cost, as well as diversification, according to Alozi from Greenwood Capital Advisors. He added that with a slightly higher cost, actively managed mutual funds can provide access to professional investment management and security selection.
Alozi suggested that companies looking to earn above the bank savings rate may consider investing in a money market account or using bank cash management services that will invest in low-risk, highly liquid, and short-term bonds.
Is Investing in Stocks Right for Your Business?
If you are considering investing in stocks as a company, make sure to identify your motivation first. Ask yourself if the money would be better spent elsewhere, or invested in business development.
You will want to have a clear understanding of your personal and business financial situation and be aware of the potential risks associated with investing. Investing in stocks can also be distracting – make sure you are able to commit the time and effort required. Taxes and other requirements will depend on how your business is organized, so be sure to talk to professionals in advance to find out the best options for your company.
Frequently Asked Questions (FAQs)
How do I know which stocks to invest in?
Be sure to do the necessary research and keep all investments aligned with personal and business goals. Consider investing in stocks related to your business since you are already familiar with the industry and the factors affecting it. You can also invest in reputable stocks and stable financial companies – these typically offer lower returns but carry lower risks.
When is the best time to invest in stocks?
If you are considering investing in stocks as a small company, the timing will depend on your company’s financial situation and goals. You can start investing at a very modest level and increase your portfolio over time.
Source: https://www.thebalancemoney.com/can-a-small-business-invest-in-stocks-5222004
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