Thomas K. Williams, BridgeTower Media Newswires
You have drive. You have self-reliance.
You’ve started a small business, led a business through a world of change and navigated myriad challenges from operational to financial.
As a small business owner and leader, it’s likely there’s some intersection between how you’re setting up a legacy and protecting your business and how you can wisely manage your personal finances, including income tax planning, risk management, retirement planning and estate planning.
Income Tax Planning
A company’s legal structure will dictate its income tax environment. Most small businesses are operating as a sole proprietorship, partnership, limited liability company (LLC), or corporation taxed as an S corporation. This means the taxable income of the company will flow through to the owner’s tax return and be taxed at the owner’s federal tax rate, which can be as high as 37 percent.
There is a beneficial provision in federal tax law that permits up to a 20% deduction in arriving at the income passed through to the owner. However – not all organizations and business owners will qualify, as other items of income, deduction or loss from non-business sources may impact that possibility. Working with an adviser who can coordinate planning between the small business entity and the owner’s overall tax situation can be valuable to help minimize cash outflow for income taxes.
Risk Management
We tend to insure risk on an individual level, including healthcare, disability, death, and home insurance. But the risks a small business owner faces are likely to mandate additional insurances.
The type of entity a small business operates within can be the first line of defense against some risks that could jeopardize the assets of the owner, such as operating as a corporation or LLC.
Other risks may require specialized insurance coverage, such as insuring against loss from business interruption, loss related to company property, and loss from employee injuries at work. A business insurance specialist is critical to help evaluate these and other risks.
Retirement Planning
Many small business owners view the entity they’ve built as their retirement plan, and consequently place much of their savings over the years back into the business as it grows. This can help sustain the business.
However, it’s also important to have some diversification as a small business owner within your retirement planning, particularly by taking steps to build liquidity outside of the company. For example, establishing a qualified retirement plan, such as a 401(k), can provide an owner with the ability to contribute far more dollars for their benefit than could be contributed by a non-business owner into an IRA account.
Navigating the complexities of retirement planning as a small business owner is essential, even if you plan to work indefinitely. Working with a Certified Financial Planner professional can help guide small business owners.
Estate Planning
This year, estate and gift taxes have a very generous exemption of $11.7 million per person. This may change based on proposed legislation discussed by Congress.
While estate planning may not be driven by saving estate taxes right now, a larger issue for a small business owner may be continuity of the company if the owner should become disabled or die. Having a documented succession plan can be extremely valuable to help preserve the value of the business you’ve built. Life and/or disability insurance may also play a role in this planning, as a critical need upon an owner’s death or disability is to provide income and a source of liquidity to the owner or the owner’s family without the need for a “forced” sale of the company.
Small business owners should also be focused on having current estate planning documents, including a will and Power of Attorney, which expresses their current wishes as to how business ownership and control is transferred in a death or disability situation.
Owning a small business can be so many things: a dream come true, a grueling but rewarding experience, something to be proud of, something about which to worry. It can add some layers of complexity to financial planning as an owner, but these complexities can be navigated with a trusted team of advisers including CPAs, attorneys, and financial planners.
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Thomas K. Williams is CEO, partner, and senior wealth adviser at Domani Wealth.
