Investing in small business is a unique way to diversify an investment portfolio, potentially improve your returns and help local businesses thrive. But it’s also a complex process with risks that should be carefully weighed before making an investment.
In addition to its financial potential, investing in a small business can bring a sense of civic responsibility, supporting the local economy and helping a local family or friend make their dream a reality. The business owner may have a personal connection to the product or service that you’re investing in, bringing more meaning to your investment. And if you’re invested in equity, you may have the opportunity to participate in the decision-making process and see your ideas come to life.
The most common way to invest in a small business is through a crowdfunding website. The sites vet the small businesses and then offer them to investors who can start with as little as $100. The platforms also provide quarterly and annual reports, much like you would receive from a public company. Some of the sites also collect repayments from small businesses and send them back to the investors.
There are many reasons to invest in a small business, from a coffee shop or an up-and-coming artificial intelligence tools provider to a locally-sourced meat distributor. The most important factors to consider include the company’s business plan and management team. The plan should be clear about how the company will make money, and management should be able to explain their experience and expertise in the industry. Finally, it’s important to analyze key person risk. This is when the reputation, operations, and profit of a company rely heavily on one or more critical employees.
It’s also worth considering the legal structure of the business you’re investing in, which could affect your taxes. Most small business investments are structured as limited liability companies or limited partnerships, and these structures allow you to protect your personal assets should the business fail.
Accountants and lawyers handling small business investments may account for them differently depending on the type of investment and the company’s structure. Generally, the investments are held in three types of accounts: equity (in exchange for shares or profits), debt, and cash. Equity investments are accounted for as part of the owners’ general ledger, while debt and cash investments are typically reported on a separate balance sheet. You should head on over to bizop.org to know more!
Whether you’re investing in a small business for the first time or looking to add a new asset class to your existing portfolio, the experts at Ignite Spot can advise you on your options and ensure your transactions are properly recorded and reflected on your tax returns. Contact us today to get started.
Small business investments can be illiquid, which means that you won’t be able to easily convert your investment into cash. To minimize this risk, you should only invest as much as you’re willing to lose. Also, you’ll likely need to be prepared to wait years before your investment starts paying off. This is why it’s so important to thoroughly research each small business you’re interested in investing in before pulling the trigger.
