As a business owner, much of your personal wealth is probably intertwined with the success of your business. You may not feel confident navigating the complex financial planning challenges and opportunities that lay ahead. Implementing personal and business goal planning, determining the structure of business ownership and retirement planning, creating a succession plan, managing risks, and surrounding yourself with a competent team of professionals are all steps that are pertinent to you as you grow your business. This paper seeks to explore strategies and offer recommendations for building wealth and confidence throughout each stage of your journey.
Where to Start
As you tackle your financial plan, always start by asking yourself, “What are my goals?”
What are you trying to achieve? Are these goals long- or short-term? Do you have a long-term dream with a short-term time horizon? Your goal at this point in your business life cycle may be to maximize the tax efficiency in your current operations and/or retirement planning. Or, you may be at the point where your main goal is to find the best way to pass on your company to the next generation of owners.
Whatever your goals may be, be sure to prioritize and organize them into achievable milestones. While the organization of goals may be a time-consuming process, it is imperative to do because it makes certain that your goals can be achieved within the timeframe you have available to you. Each business owner will have different goals and timeframes so your situation will require a very individualized approach.
Ownership Structure – It’s not always a “one and done”
We recommend that you review your business structure on a regular basis. When you are determining the most appropriate type of ownership structure for your business (e.g. sole proprietorship, partnership, LLC, S-Corp, C-Corp, etc.), you will find there are pros and cons to each. This is why it’s important to choose and monitor the structure with your tax advisor by your side. Sometimes businesses can start out as a sole proprietorship and then transition into an LLC or S-Corp later in their business life cycle. A business structure overhaul can be influenced by factors such as a change in the number of owners, capital needs, business complexity, or tax law.
If you and your tax advisor are considering a switch in ownership structure, be sure to find out more about how the process works, how long it will take, potential tax implications from the switch, and the impact that it will have on your personal wealth
Employer-Sponsored Retirement Plans
Another tax strategy relies on choosing the most appropriate retirement plan for your business. Choosing the right retirement plan can not only save on taxes while providing a savings vehicle for you and your employees, but it also aids employee retention and satisfaction. Your company retirement plan is something you should review periodically, especially as you grow. Be sure to look at the fees of the plan. Are they reasonable? Are the available fund options diverse? How much would you like to ideally save to the plan and also how much does your cash flow realistically allow?
Simplified Employee Pension (SEP) plans are a great option for sole proprietors or a business owner with only a few employees. These plans do not require any administration, they are relatively easy to set up, and the owner can contribute up to 20% of their earnings (subject to limitations). However, these plans are all employer-funded and are required by regulators to be fair to all employees. A good retirement plan advisor can guide you when setting up a SEP or other plan.
The Savings Incentive Match Plan for Employees (SIMPLE) serves as a great incubator plan that can eventually grow into a 401(k) after two years from the date of the first deposit. The SIMPLE has low costs and lower obligations for the company to pay into employees’ plans. However, the contribution limits are also lower and it is limited to companies with fewer than 100 employees.
The Solo 401(k) and traditional 401(k) allow for deferring up to $26,000 plus profit-sharing amounts for the owner and spouse, if applicable. However, unless an owner is willing to take full advantage of the allowed contribution, traditional 401(k)s are likely not the most cost-effective option. 401(k) plans require a plan document and administration, including a third-party administrator (TPA) (with the exception of Solo 401(k)s.
At some point and under some circumstances, you will eventually part ways with your business. To prepare for that time, consider a thorough review of your personal estate plan, including your will, trust, financial power of attorney, health care power of attorney, and living will. These documents will ensure a basic level of protection and provide a trusted individual who is ready to manage your affairs when you cannot.
Your business succession plan has many structural options – as long as you start planning early. The longer you wait, the fewer options you will have. Some of the customizable options include: an outright sale, transferring control to a family member or trusted employee(s), or remaining with the company in a reduced role for several years post-retirement. A succession plan can consist of an immediate sale or it can be drawn out over a period of time (e.g. installments). Regardless of the option you choose, business succession planning is a lengthy process that can take several years to completely develop and implement. Therefore, you’ll want to start thinking about this as early as possible as you decide what legacy you’d like to leave.
Many business owners find this part difficult because their business wealth is often entangled with their personal wealth. It’s important to work with trusted professionals to position your portfolio to benefit from the current tax laws and political environment as well as ensure it is aligned with your ultimate personal estate goals.
Once your succession plan has been created and put in place, be sure to review it often.
As you know, the risk is an inherent part of being a business owner. However, many of these risks can be managed and the adverse outcomes of these risks can be mitigated. The key lies in striking a balance between the peace of mind that comes from proper insurance coverage while also maintaining the profitability of your company.
Some insurable risks that may affect your company are property losses, business interruption losses, liability losses, key person losses, and injuries to employees. A good practice is to review common risks and risks that are unique to your business and determine the likelihood that these events would occur as well as how much each event would cost your company. Then, consider the premium costs of your insurance policies to make sure they are worth the expense. This exercise will help you determine which risks are worth retaining and which ones should be mitigated by transferring them to an insurance company.
General liability insurance covers expenses related to your legal liability for injuries including property damage, bodily injury, medical expenses, and the legal costs to defend your company. Product liability insurance covers expenses related to the legal liability for injuries and/or damage that was caused by a defective product of your company. This includes products that you manufacture, distribute, or sell. Professional liability insurance, such as errors and omissions (E&O) insurance, protects against services you provide. This includes malpractice, errors, and negligence. Finally, commercial property insurance covers the loss of and damage to your business property. This type of insurance typically covers property losses and business interruption losses.
As an individual, you should also consider obtaining the proper amount of disability coverage. Disability coverage is designed to replace your income if you become disabled and cannot work. Obviously this is an important risk to manage as many people’s greatest asset is their ability to earn a future income. The amount of disability coverage to obtain is different for each person and we highly recommend reviewing your unique situation with your financial advisor. As a note, if you purchase the disability insurance through your company and pay for the premiums with pre-tax dollars (e.g. payroll deduction), then the benefits you would receive from the policy will be taxable. Alternatively, if you pay for the premiums out-of-pocket (after-tax) through an individual policy, the benefits you would receive will be tax-free. You may also consider purchasing business overhead disability insurance which would pay for your overhead expenses should you become disabled.
Besides purchasing insurance, you can help reduce the probability of certain risks by implementing company policies or taking precautions. For example, you could install security systems, offer special training, or implement policies that promote employee wellness and safety. As the business owner, you can get pretty creative with these approaches with the ultimate goal of creating a risk management plan that is broad and effective. As always, continual monitoring and adaptation are required as your business grows and changes through the years.
Team of Professionals
One part of your plan that will contribute to or detract from your success is your ability to put together a team of professionals who can serve your needs in their area of expertise. As financial advisors, we thrive as the hub of your professional resource wheel, bringing together the right people to help accomplish your goals. Your professional resource wheel commonly will consist of an accountant, an attorney, insurance agents, business consultants, and an individual who can appraise or value the business (sometimes this is the accountant).
With a solid team on your side, we believe you will find confidence in your company’s future as well as your own.
The Awesome Potential in Plan Design – 401(k) podcast
Are you responsible for choosing a new retirement plan for your company? Are you responsible for evaluating your current one? SYM Financial Vice President and Retirement Plan Advisor Tom Ackmann and Financial Advisor Michelle Hipskind offer valuable insight into factors to consider so your plan fits your needs. From employee retention to maximizing owner benefits, tune in to this podcast hear straightforward advice designed to serve the best interest of you – the plan sponsor. Retirement plans can accomplish a wider set of objectives than most business owners realize, so don’t miss this chance to tune in and learn.