My last net worth update was met with a number of questions, more specifically, what is the $200,000 “corporate investment account” that has magically appeared as an asset line item?
In 2006, I created MillionDollarJourney.com as a tool to keep track of my financial goals and as an outlet to share my ideas about building wealth. The readership grew faster than I had anticipated as did my interest in building websites. From there, I partnered in building a food blog, weight loss blog, a personal finance forum, then eventually consulting to help others build their online presence.
While a growing company was great, the multiple niches started to take too much of my time and I was starting to burn out. Although revenues were high, I’ve since reduced my time (and income) spent on other niches to focus on my personal finance sites – my main interest.
Online revenues generated over the years flowed through my personal corporation. The corporation was setup with dividend sprinkling in mind, that is specific shareholder classes were created to distribute dividends in a tax efficient manner. For example, I own shares of a specific shareholder class (a), while my wife holds shares in another class (b). In lower personal income years, like maternity leave, the directors of the corporation (me) can decide to flow more dividends to share class b for a lower overall tax rate.
While some people get a tax refund every year, I have arranged our finances to be a little different. Every year, enough dividends are distributed so that my wife and I receive close to a $0 tax refund. This also means that a large percentage of corporate earnings are retained in the company. As a frugal guy, I also run the company as lean as possible.
What is the Corporate Investment Account?
This account was recently created to put some of the corporate cash to work. It’s basically a discount brokerage account that’s connected directly to my corporate bank account. The corporate online stock brokerage has the exact functionality of a personal brokerage account. In other words, I have the ability to buy/sell stocks, ETFs, mutual funds and collect dividends and/or interest. Right now, the account is sitting in cash (bad habit of mine), but the plan is to invest in dividend stocks (surprised?). Once invested, I can flow through eligible dividends to shareholders without the corporation facing any investment taxes.
To clarity the “tax liability” on the net worth statement, I used 23% personal tax rate on the balance which has been the average tax rate on the corporate dividends received over the past several years. As mentioned, we don’t actually pay the dividend taxes “out of pocket” as we use the tax refund to offset the tax. If we weren’t expecting any refund in a particular year, we’d likely refrain from withdrawing from the company.
So why didn’t I include it as an asset in the net worth statement before now? I can see how it appears like a magic number just before the million dollar deadline. While it appears convenient, I’ve been planning on including corporate cash since 2012. To be frank, up until 2011 I wasn’t going to include corporate assets on personal net worth statements. While cash reserves in the company were building, 2011 and 2012 were breakout years where the consulting side of the business took off.
With a significant amount of cash in the company, the plan at the end of 2012 was to announce the cash once it reached a brokerage account. With the markets continuing to move upwards, as a value investor, opening another brokerage account fell onto the back burner and didn’t happen in 2013. The expectation of some sort of correction in 2014 motivated me to open the trading account earlier this year.
In the big picture, whether I include the cash now, later or never, it’s of little consequence. As one reader pointed out, if I was more realistic with my home and pension valuation and included the value of our two vehicles, I’d already be a paper millionaire. I’ve said this before – reaching a million dollars in net worth is a milestone and not the end of the journey. The main goal is to continue growing income producing assets. For some, it’s through human capital (their job) and/or real estate. For me, it’s by growing passive income through my company and through long term dividend investments.
Altogether, I think that disclosing corporate cash assets (and corresponding tax liability) in the net worth statement is in alignment with the financial transparency and intentions of this blog – and hopefully you do too.