|| You Own and Operate a Small Business
|| You Own Stocks (shares) in Businesses. And You
Keep your day-job.
| Money Needed
|| Usually you need a large sum of money to get into an
owner-operated small business. If a business is going to replace your
former employment income it is likely going to cost you at least a
year's salary, perhaps MUCH more.
||You can start buying mutual funds with as little as $50 or
$100, and usually with a plan to buy additional funds monthly or yearly.
You can start buying individual shares with as little as about $1000.
However $10,000 to $25,000 is more realistic before you open a
self-directed account to buy shares. We have an article
that explains how to get started.
You could buy shares with the assistance and advice of a full service
broker if you have at least about $100,000
| Borrowing to Buy
|| For a small business that has real estate you can
borrow some of the money. However for many businesses you will find the
bank unwilling to lend. You could borrow on your personal line of credit
or against your house. Vendor financing is also sometimes possible. In general
you will want to have a large down payment and avoid too much
The better franchise opportunities, for example, will insist that you
bring a very substantial down payment to the table.
|Borrowing to buy stocks is often frowned upon. You can, through a margin account, use some leverage. In theory you can borrow on
your line of credit or against your house to buy stocks. It can be
appropriate in some circumstances. In general though, investors tend to
purchase stocks with their own money such as in a retirement account.
| The Initial Buy Decision
|| You will want to think long and hard about the type
of business you buy. Once you buy it may be difficult or impossible to
sell. Almost certainly a quick sale would involve a large loss. You may
be virtually locking yourself for life into this business, so do think
long and hard.
||You can buy easily for a very small commission. Usually
the buy / sell spread is tiny and, if you wanted to, you could exit
immediately at a only a tiny loss. You still need to be careful what you
buy but not to the same extent as when you buy a business.
|| Often the owner of a small business has no
diversification. He or she is "all in".
||Diversification is almost automatic when investing in
stocks. There is usually little reason to expose too much of your money
to any one stock.
| Job for you
|| As an owner you can hire yourself. (Though it's not guaranteed
that you will have the money to pay yourself!)
||You will be keeping your day job, unless you are retired
or quite wealthy
| Jobs for the family and friends
||You have the option of hiring family members and friends,
depending on your needs. This can be good, but it has its down sides as
well. Having to fire or layoff these people would be no fun
|| Not applicable
|| Depending on your view point you "get to"
or you "have to" manage the business. You get to make the
decisions. But also it is your phone that rings when any trouble arises or
any material decision is required.
||Not applicable, you don't have to worry about managing the
businesses you own shares in, nor do you have any say in it.
| Who's the Boss?
|| To a large degree you are the boss. No one tells you
what to do. (Well except that bankers and customers often can be pretty
bossy as well.)
||You are the boss over your investments.
In your day job with rare exceptions like sales jobs, and
certain professions you always face the fact that there are bosses that
run your life. They judge you, often in arbitrary ways. As you get older
and wiser you will usually face working for bosses who are younger than
you at some point, and not as knowledgeable. It can be annoying.
| Financial Security
||A business may or may not offer financial security
||Keeping your day-job usually offers financial security
although that is not guaranteed forever.
|| not applicable
|| Sometimes applies
| RRSP savings
|| If you take a wage from your business you can
contribute up to 18% of earned income to a limit of $22,450 for 2011.
But that is only useful if you can afford it.
||If you have a pension your allowable contribution to RRSP
may be small or non-existent.
| Physic Income related to the Asset
|| There is an important mental satisfaction to being
able to drive up to you business and to point out to others that you own
|| While there is a mental satisfaction to owning a growing
pile of loot invested in stocks, it's not quite as satisfying as driving
up to your own building. And bragging to friends about your loot is
socially frowned upon.
| Calculating Profits from the business(es)
|| Profits are calculated by your book-keeper or
accountant (who may be yourself)
||It would take some effort to calculate your share of the
profits of the companies you own shares in. It will not be reported to
you by your broker. It can be calculated by dividing the P/E ratio of
each stock into the value of stock owned but few people make this calculation.
| Who gets the profit
||For a lot of small businesses there may not be any profit
beyond a modest wage for the owner. But if there is a profit, you get to
decide how much to dividend out to yourself and how much to keep inside
the business for reinvestment or perhaps just to shelter it from the
taxes that would apply if you paid yourself a dividend
||Businesses in which you own shares are likely to make
profits. They will decide how much (if any) to pay out as dividends.
Profits that they retain are meant to be used to build up the
business. In most cases retained profits help the business grow and its
share price to increase over the years.
| Making the Profits Grow
|| Through hard work, and / or smart work or through
good luck you may be able to increase profits. The sky may be the limit
in some cases. In other cases especially if you don't work hard, or
smart or you have bad luck, profits can evaporate.
||You will have zero control over the profits of the companies
you own shares in. But you will have the ability to try to choose companies
that will grow their profits.
| Importance of Profits versus the Value of the
||The cash flows and profits of the business and the wages
or dividends that it can pay you are extremely important. The value that
you could get if you sold the company may be of no importance at all
except in the rare event that you do decide to sell.
||The value of the shares on the stock market is usually the
most important factor. In some cases you will also value the dividends.
If the price of the shares fall you will likely not be comforted much
if the profits have actually increased.
Similarly if the share price increases you may not be much bothered
if that happened despite a reduction in profit.
In the longer run profits matter a LOT, but stock investors usually
focus on the short term.
|| You could face liabilities even beyond the
investment in your business
||You have no liability, the worse that can happen is that
your shares become worthless.
|| As noted in the Initial Buy Decision above, you will
often have limited liquidity. It might take months to sell if you
decided to sell. Often the sale price might be less than you would like.
If you are very key part of the business, it may be difficult to
sell because perhaps the customers will leave if you leave.
Often there is a large buy / sell spread and so unless a motivated
buyer comes along, you may need to lower the price to attract a buyer.
You will face legal fees as well.
|You can sell anytime. You always know the price at which
you can sell. In most cases the bid/ask spread is tiny and the
Commission to sell is VERY tiny. Capital gains taxes apply to any gain
unless you were investing in a tax sheltered account.
| Market value
|| Usually you will not know the market value of your
business with any precision. And, if you intend to operate the business
for a long time its market value may be largely irrelevant.
||The market value of an investment portfolio is presented
"in your face" at least monthly and often daily or minute by
minute as you obsessively check it value online. It can drive you to
distraction and cause you to bail out at at inopportune times.
| Tax Advantages
|| You may be able to deduct certain living costs and a
portion of vehicle expenses. You may even be able to claim certain
travel expenses - such as attending a conference, which you may be able
to combine with a vacation.
You can choose to pay yourself a salary and create RRSP room and
CPP contributions. But you are taxed heavily.
Paying yourself with dividends instead of profit may offer a lower
tax rate (counting corporate and personal tax)
There may be some limited exemption from capital gain taxes on the ultimate
sale of the business
|Income from your day-job is heavily taxed and there are
very few deductions available.
Investment capital gains can be sheltered by not selling. And
investment capital gains are taxed at half the regular rate and dividends
are tax advantaged. Investments in RRSP are not taxed until withdrawn
but then are taxed heavily. Tax Free Savings Accounts offer tax-free
investing forever. In general no investment expenses are deductible except the
direct costs you pay to your broker. Even your subscription to an
investment newsletter is not deductible.
| Becoming Truly Wealthy
|| Most business owners will never become truly wealthy
but definitely some will.
||Few stock investors will become truly wealthy through this
means. But a few will, those who start young and save and invest
aggressively may become truly wealthy late in life.