Three reasons to consider investing through a company

Becoming an entrepreneur in Estonia is easy: you will find a suitable form of entrepreneurship, choose a business name and field of activity, and register your company in 15 minutes. However, if and when to start investing the money generated by your business?

It is quite common to start a small business at some point in your career, as you have developed a competence that is in demand and could be successfully shared to earn extra money. At the same time, the money earned as a company is not so much at the very beginning that it is worth paying it out to yourself regularly, or there is simply no direct need for it. In this case, one good option is to invest this money. Why? We will discuss it next.

1. Higher rate of return on available money

Often, new small-sized businesses use their legal body to provide some service, be it marketing, programming, consulting, etc., with very low or non-existent input costs. All the money from the service sales is basically profit.

Rather than just letting the money you earn accumulate in your business account, it is wise to consider investing it. This is how you protect your business money from inflation. With the LHV mobile app, you can buy shares, bonds, and popular cryptocurrencies for your company with just a few clicks.

2. Greater flexibility

As a private investor, it is generally recommended to use an investment account system. In this case, the monetary contributions and disbursements made on the account must be declared. Income tax liability can be deferred.

Unfortunately, it is not possible to invest in real estate, cryptocurrencies, loans or other asset classes from an investment account – this money can only be invested in securities. If you are planning to invest as a private individual in the other above-mentioned asset classes without using the investment account system, you will need to declare all transactions.

There are no such restrictions when investing as a company. Also, a company only has to pay income tax on profits when it withdraws the profits from the business. So, for example, in the case of real estate, all the costs associated with a rental apartment (including insurance, repairs, and management) can be charged as business expenses.

For example, if a lessor of an apartment as a private individual receives 500 euros a month in rental income, they will have to pay 100 euros in income tax on this, i.e. only 400 euros can be reinvested. The company has no tax liability on the same amount of rent and can reinvest all the 500 euros earned. The tax liability arises only when the company pays out revenue of ownership, i.e. dividends.

It is worth noting that the example is calculated with the tax rates applicable at the end of 2024. If the personal income tax were to change, or if, for example, the taxation of corporate profits were to be added, the benefits of investing through a company could be reduced.

3. More future-proof

Keeping your investments and assets in your business makes it much easier to pass them on to future generations when needed. For example, if you inherit securities as a private individual, they pass to your heirs at a zero acquisition cost. This means that when they sell securities, they cannot deduct the acquisition cost from their income because the securities do not have an acquisition cost. By investing through a company, on the other hand, you can inherit the company as a whole, with all its assets.