The investment in a corporation is comprised of:

  • Retained earnings
  • Shareholder loans

This can be a large dollar figure. Retained earnings acrete when net profits add to the opening year retained earnings balance in the shareholder equity section of the balance sheet. Shareholder equity is reduced  when a business incurs a loss.

An increasing retained earnings will improve business capitalization and make creditors (like your commercial bank) happy. The main issue that I have with retained earnings is that they are locked in a business. They can be paid to shareholders as a dividend but the business must (a) replace the dividends paid out my future earnings and (b) have the cash flow to pay the dividend.

Canadian households have a lot of net worth tied up in the equity in their homes. Many Canadians downsize – move from their home to a condo or apartment – as they age and the kids leave the nest. They monetize the wealth they accumulated over the previous 25-40 years. A small business corporation is a key line item on a personal balance sheet. The value of business equity can be estimated but the main problem remains: How do you monetize the equity in your business?

Releasing retained earnings should be a major focus for a shareholder of a small business corporation. How can I take a combination of salary and dividends to minimize my tax liability? If the business is not in a cash position to pay dividends, what steps should you take to get the business “dividend ready?”

A financial planner has models to restructure your investment portfolio such that preservation of capital and income (from your investments) goes to the forefront after 50.

Why isn’t this done with retained earnings?

 

 

 

 

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