Social lending – why should you invest as a company?

Social lending is an easy way to invest, but sooner or later most investors come to the point where the idea of starting to invest under a company becomes interesting. (Mostly after you’ve paid your first bit of income tax and seen how much that is!)

As my portfolio has gotten bigger, I’ve started to consider investing as a company as well, since the amount of money you save on taxes is impressive.

Overall there are two main benefits and two main downsides and upsides of investing as a company:

Benefits:

– You can postpone paying taxes until you want to take out the money from your business in dividends. (Essentially pre-tax money gets to grow in peace.)

– You can charge off defaulted loans that are showing no recovery, thus lessening your tax burden even further.

Downsides:

– The way Bondora and others handle data reporting right now doesn’t work too well in terms of the info you need for accounting.

– There is no standard for how to report Bondora investments, finding a bookkeeper might be difficult and learning the reporting yourself might be time consuming.

Real numbers based on my portfolio

The numbers speak for themselves though, and Krista, who runs an accounting focused blog in Estonian calculated sample returns based off my portfolio, so that’s food for thought. Go look at the numbers to see the difference. (Spoiler: I’d have increased my earnings by more than 40% if I’d invested pre-tax earnings as a company.)

36 thoughts on “Social lending – why should you invest as a company?

  1. When investing into loans I only do it as company and only invest into Baltic stocks as individual. The bookkeeping is also not a problem. I do not track individual loans but only monthly balance (new loans, received principal and interest). Some people even do it yearly. You can use for example Merit Aktiva, that is very easy and has good manual and also you can find different forum threads about various problems and solutions.
    So good luck with it and if you have any questions I can answer them if I know the answer :)

    1. I’d be very interested in hearing about the bookkeeping at some point! I’ll keep it in mind.
      How do you charge off loans if you just keep track of overall portfolio size?

      1. I have not yet charged any loans off as technically Bondora has to do it first but it wont be hard. If I remember correctly you just have to reflect it as “other financial charges” (journal transaction from Bondora account to “other financial charges account”).

  2. Great post!
    Even though you have to pay approx. 200€ for company creation, it will pay off definitely in the long haul.
    One downside is that you can’t transfer you Bondora loans from private account to company account without any fee. You have to put your loans up to secondary market from private account and then you have to purchase them with company’s account, thus you will pay 1.5% on both transaction, this can have influence on your return if you have bit larger portfolio.

    1. But what if you put loans on sale for 100% discount, then the loan value is 0.- and 1.5% is calculated from sell value so it will end up 0.- for fees?

      1. Good point Olavi. It should work, the maximum discount can be -99%, but still the fee would be much lower. I will try it soon as I need to transfer my loan pieces.

        1. The likelihood of someone picking up a loan piece and you losing it while trying to sell from one account to another is quite big though. Just losing one piece like that makes the potential savings on fees not worth it.

    2. Another issue being though, that giving out loans can’t be your main source of income for the company, because then you’d be subject to another set of regulations as a credit provider.

      1. Kristi,
        Quick question if I may, what is the threshold over which the company is required to obtain a credit license? Is it when more than 50% of the company’s revenue in a given year is derived from p2p loans? Or does it relate to the company’s loan portfolio vs total assets?
        Thanks,
        P.

        1. That is a great question and no one knows the answer to that. Logic dictates that the 50% should be the interest you actually earn, not the loan portfolio size, but no one has given a definitive answer on this topic yet.

        2. I am sure it applies when 50% of income comes from interest but I have a friend who asked directly from EMTA if they really care if the company invests only into P2P and they did not directly said that they don’t care but stated if the documentation is valid then there should not be any problems.

          To be sure then invest also into dividend stock and make sure that dividend payments make up 51% of the income and there is no problem 😉

          1. Christ and Taavi, many thanks for your responses. Taavi – apologies, but what do you mean exactly by “if the documentation is valid”?
            Thanks,
            P.

  3. I am not sure how Taavi is handling this but it seems to me that this is not that straight forward as it seems. Maksuamet will not look kindly at company that pays dividends but does not employ anyone and to be honest – although this is part of much bigger issue we will probably not be able to discuss on blog comments – but tax evasion is tax evasion even if you get away with it…

    1. I do not pay dividends yet and I am paying salary as this company has also other income. However this is not the case. Many people have assets holding companies without no employees and if you make money passively then you do not have to pay any salary and can pay the dividends. Dividends/interests from investments are considered as passive income so no problem.

      1. Passive income is fine of course but it was described in linked blog how Kristi offered services and could have “saved” money that went for social security and income tax. The biggest difference in outcomes was generated by this “saved” tax money. That is not fine any more because if you do offer services or sell goods then its not passive any more and you need to employ someone.

        1. You are right. I did not read the other blog. If you make money by other services then you should pay the salary. If you bill higher than the average company offering the same service in Estonia (per hour) for example then you can count this extra money as profit and you can pay dividends from the profit. I have read EMTA guidelines and they state that they will use the average rates if they have any doubts.

          1. Generally you do get away with it if you pay at least minimum wage but technically it is tax evasion and person who understands and respects the way how Estonian Republic is built to operate should not do this. That’s just my opinion.

          2. Krista ran the example based on side income from projects, that just means gathering up money into a company for investments, not tax evasion – I do have a full time tax paying job that finances everyday life :)

        2. The issue being though – a company needs a source of income for you to be able to use it for investing. If no services or products are being sold, there would be no initial capital to invest. With this example – I run a company that does translation services, gathering up money for investments, then invest the money and then later on start paying out a salary if I wish.

    2. We’re not talking about a situation where I’d be officially unemployed and then pay out dividends – I have a full time job that pays taxes, the money going into the company would be side jobs and services, I still have a fully funded pension and social security accounts.
      It’s not tax evasion to gather up money into a company for investing purposes – and maybe at some point in the future start paying yourself a salary for that (but that’s not necessary either.)
      Overall, I’m a firm believer in taxing things, in Estonia sadly the system isn’t as flexible as it could be though.

      1. Fact that you do pay taxes from your other income is absolutely irrelevant. All income is taxed the same not just your “main income”.
        If company offers translation services then someone has to work for this company. This is not passive income. Company itself can’t translate anything. If someone works and translates then this person has to be paid and taxes have to be paid on that persons salary. If someone is doing accounting for this company, then this person has to be paid and again taxes have to be paid for that persons salary. So yes – it is tax evasion if you offer translation service through company and dont pay yourself any salary for doing it and then use this money to invest. You are not allowed to postpone social security tax in this way. As I said, minimum that you get away with is minimum wage but even this would be unethical. Taavi said it correctly – market price for these services is fair and correct, anything that is over market price can be used to generate extra by postponing income tax payments.

        1. While I agree, that paying out no money at all is somewhat unethical, and even paying out minimum salary is problematic due to skimping on overall taxes, the majority of self employed people who bill through a company do not pay out all the money (the same as ordinary companies keep profit waiting), the profit can be kept aside to invest without any ethical issues I think. I’m most likely seeing a model where you earn money, pay out some of it as salary and then invest the part that you don’t pay out – as a person who sells their own services, you can decide where the profit point lies.

          This is a systematic issue however, that could be solved easily by allowing people better use of the investment account so that ordinary people wouldn’t move their investments to their company since it’s financial suicide to do otherwise. (Even the 20% delayed taxation just off not having to pay income tax as a company has a huge snowball effect in the long run.) If I could use the investment account for social lending I’d do so happily and invest with after-tax money and only postponing the income tax portion of the tax obligations. It’s entirely rational for people to refuse to give up that much of potential earnings due to legal inefficiencies.

  4. I just recently started also with a company and do my p2p loans through it.

    A tip i got was that as the data inside your account in bondora, moneyzen or other places is not public, then it’s totally fine to treat them as “black boxes”. In bookkeeping it just means you write how much went into one particular portal as investment and one day, when you do take out something from a portal, it’s the return of your previous investments. In bookkeeping, what happens inside a portal, is not described. So, it would be a black box.

    I am still learning this accounting and bookkeeping stuff by my own. I have few accountants as contacts with whom i spoke about it and did my very first rows into bookkeeping software. But they also haven’t told me it would be wrong to treat them as black boxes.

    So in that sense, bookkeeping isn’t a rocket science… Or I’m on a totally wrong road. 😀

    1. That’s an interesting take. With all the information the sites currently give out, would treating it as a black box still be ok? That seems… way too simple!

    1. That’s interesting. When I use palgakalkulaator it also gives me the 3534, but when I look at the more detailed information then it gives the 3480. It might be the reduced income tax or the 2nd pillar retirement changes from 2013 to 2014? The 1% might make the difference there?

  5. Over here in Sweden there are different types of companies. All with different strenghts. I assume it’s kind of similar in Estonia. Which type of company/firma do those of you who have firmas use?

    1. In Estonia that’s actually easy, you essentially have only two types of companies, OÜ and AS. The OÜ is a limited liability company that can be founded with no money essentially, so that’s what people use. (You mostly need an AS if your company has huge assets and/or wants to enter the stock market.)

      1. Actually we have 4 or even 5 if we count also FIE (self-employed). TÜ (general partnership), UÜ (trust company?), OÜ (private limited company), AS (limited company).

  6. Nice calculations :) I have now tried to grasp Krista’s post. Very interesting reading, though in my case I no doubt misunderstood a lot despite the benefit of dictionary and I must confess I didn’t read all or it 😮 Anyway the numbers look fine and would clearly motivate using a company. I assume the “93%” is an estimate for compensating some unfortunate but inevitable defaults.

    I also assume a tiny piece of information has disappered in Krista’s table. That is the empty space in the intersectoin of row: “kasum enne tulumaksu” and column: “era” where I suggest “4395” is missing.

  7. Mõtlesin ka firma teha, kuid nagu ma aru sain siis firma saab küll odavalt teha, kuid raha ei saa üldse enne välja võtta kui algkapital on kokku kogunenud intressidest ja sissemaksetest? Ehk, kui kasutan firma kaudu investeerimist, et raha koguda siis see algkapital jääb firma eksisteerimise ajaks nii, et seda välja maksta ei saa?

    1. Jah, osakapital (2500€ ehk siis 2500+maksud) tuleb tasuda enne kui saab dividende välja võtta. Plus tasub mõelda, kas raamatupidamisvaev on seda väärt. Pluss laenuandmine ei tohiks põhitegevus olla, mis on kõige hägusam punkt.

Comments are closed.