Just as you’d invest personally to grow your own financial base, it’s just as important to invest as part of your business activities. Known as corporate investing, this approach can offer some tangible benefits but it’s important to consider what you want to achieve and always approach the process strategically with a good understanding of the options available.
What is corporate investing?
Corporate investing is the practice by which companies use surplus funds to invest in other businesses and assets to generate financial returns. Any returns can then be used to safeguard the business for the future or provide capital needed for a new initiative. You may find this approach particularly useful if your business is in profit, or has a good level of surplus cash, and you are not looking at company expansion for at least the next five or so years.
The benefits of investing as a corporation or business
Investing as a corporate entity can bring numerous benefits. Firstly, it offers a means of diversifying revenue streams and boosting profits. Secondly, it can help your business remain competitive by enabling or funding innovation, research, or the development of new services. Corporate investing can also provide significant tax benefits, including being able to deduct any losses for certain types of investments. Finally, investing in socially responsible securities can help you to address any strategic goals you are looking to embrace from a CSR perspective.
Corporation tax considerations
Companies don’t pay Capital Gains Tax (CGT) in the same way that individuals do, but it’s worth bearing in mind that any gains realised will be subject to Corporation Tax (CT). Although CT has, in recent years, been set at lower than the basic rate of individual Income Tax, it now sits at 25% for those entities with profits of over £50,000. Some allowances exist and companies with profits between £50,000-£250,000 will be entitled to a tapered Marginal Small Companies Relief (SMCR) – effectively a deduction to the tax liability. Those with less than £50,000 of profit will pay CT at the previous rate of 19%, and companies with profits over £250,000 will pay 25% CT.
Any tax due on the investments, or the returns they provide, are usually calculated depending on the type of investments in place and the accounting basis used by your company. If your business is classed as a micro-entity, then no tax is usually due unless any funds are withdrawn from the company. Micro-entities are determined by meeting two out of the following three criteria:
- A turnover of £632,000 or less
- £316,000 or less on the balance sheet
- 10 employees or less
Investment options for corporate investing
There are various types of investments available to corporations, which your professional adviser can explore with you. Structuring corporate investment portfolios will ideally be tailored to your organisation, and particular objectives. Portfolios typically comprise of the following:
- Property (REIT’s)
- Mutual Funds/Unit Trusts
- Exchange Traded Funds (ETF’s)
- Exchange Traded Commodities (ETC’s)
Understanding the different investment options available for corporations
When making investment decisions you need to consider how long you want to invest for, and whether any specific factors need to be taken into account – for example, if your business operates in a green or environmental space you may need to ensure any investments align with your corporate values. It will also be vital to undertake an extensive assessment of your company’s attitude and capacity towards risk so that the most appropriate portfolio can be constructed.
Developing your organisation’s investment portfolio
When approaching any corporate investment, it’s vital to plan and consider a range of variables. This might include environmental, social or governance (ESG) considerations and whether you need to positively or negatively screen any investments or funds. In addition to this you may need to consider your attitude to volatility, and whether you have particular preferences when it comes to types of assets, geographical areas or sectors you’d like to include/exclude.
As with all investments it’s worth bearing in mind the importance of diversification too. This ensures that you lessen unsystematic risk (or company specific risk) by spreading investments across a good selection of funds (in varying asset classes and sectors) which work together well to reduce volatility. Do also consider the regulatory strength of the jurisdiction where any assets you’re investing in are held.
Finally, it’s imperative to regularly monitor your corporate investment solutions in line with your goals, as these will likely change over time, and so you need to make sure how suitable they continue to be.
When it comes to running a business it will be important to accurately manage cash flow to determine what funds are available to invest. In the short to medium term, you’ll need to ensure that you have sufficient liquidity and access to capital for shorter-term operating costs as well as a sufficient ‘buffer’ for any potential headwinds that might arise.
Professional advice for corporate investing
Corporate investing can be a complex process, and you’ll need to consider your approach strategically. As well as choosing the right investments, you’ll want to maximise their tax-efficiency and ensure that some remain as liquid as possible for when capital is required, or to amend your strategy. Speaking to a firm which has specific experience when it comes to corporate investment services will help you properly approach your objectives and implement the most suitable strategy.
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