Small Business Owners: Protect Your Wealth & Grow Your Legacy


Published August 9th, 2022

Reading Time: 5 minutes

small business

Written by:

Alec Montoya, CFP®
Zoe Network Advisor

Small Business Owners: Protect Your Wealth & Grow Your Legacy

Published August 9th, 2022 
Reading Time: 5 minutes
small business

Written by:

Alec Montoya, CFP®
Zoe Network Advisor

Set your small business up for a successful future. Evaluate and review various questions that help you establish good routes and make you aware of key aspects for growth. 

As a business owner, it is important to periodically review your: legal structure, insurance coverage, tax situation, benefit offerings, and succession plan. This blog will review 5 questions to ask yourself and remain aware of critical areas of financial planning for your business.

1. What legal structure should my small business have?

Whether your business is a side hustle or your full-time occupation, it is important to consider your legal structure. The structure of your business can impact taxation and personal liability. 

Several common forms of ownership include Sole Proprietorship, Limited Liability Company (LLC), S Corporation, C Corporation, and Partnerships. The Sole Proprietorship is the easiest form of business ownership, but it can also expose you to personal liability. Other ownership forms require legal work but can offer personal liability protection and tax planning opportunities.

If you are sole proprietor, you may want to consider evolving the structure of your business to a form of ownership that protects your personal assets or one that offers potential tax benefits.

2. How can I manage risk for my small business? 

Your business may own valuable assets that you want to insure like real estate, equipment, and automobiles. It’s also important to review liability coverage, overhead insurance, and specialized lines of insurance related to your industry.

I would start the insurance review process by reviewing the business balance sheet. Your business balance sheet will identify assets to protect. I would then have a conversation with the agent about your work and how the business interacts with stakeholders. This conversation can aid the agent in better understanding where risk may arise during operations. A collaborative conversation with you, your financial advisor, and your insurance agent can be especially effective in finding the right mix of insurance coverage.

3. How do I avoid overpaying in taxes as a small business owner?

Proactive tax planning is a must. It is easy to be caught off guard during tax season by an underpayment. 

Tax planning involves forecasting your business revenue, expenses, and profitability. A profit and loss statement is a good place to start this analysis. Your accountant and financial advisor can use tax planning software to forecast how taxes impact your business and personal financial plan. Proactive tax planning can help you budget for taxes, find additional deductions, and create better awareness of business fundamentals.

4. What employee benefits should small businesses offer? 

Employee benefits can be a valuable form of compensation and offer tax benefits. Educating your staff about their benefit package can excite them and promote higher retention.

Several key benefits include: 

Insurance Offerings: As a small business owner you and your employees may need health insurance, life insurance, or disability insurance. These benefits are often expected by employees and are a good way to differentiate yourself from other employers.

Retirement Plans: There are various retirement plans you can choose from. A good advisor will educate you about the best option and help your team understand their retirement plan. Several retirement plans structures that I see in practice have been described below:

  • SIMPLE IRA: The SIMPLE IRA allows an employee deferral up to $14,000 in 2022. Those age 50 or older can save an additional $3,000. Employers can either match employee contributions up to 3% of salary or make a 2% non-elective contribution. All savings to a SIMPLE IRA plan are tax deferred.
  • SEP IRA: The SEP IRA is a tax-deferred account that offers a maximum contribution up to 25% of your income or net earnings from self-employment but limited to a maximum of $61,000 for 2022. This plan may not be ideal if you have employees because you must fund each employee’s account with the same percentage contribution as your own.
  • 401(k) and Profit-Sharing Plan: This account structure can offer flexibility for both the business owner and employees. Employees can save their elective deferrals into either a pre-tax 401(k) or a Roth 401(k). For 2022 the IRS elective deferral limit is $20,500 or $27,000 for those aged 50 or older. In addition to deferrals, employers can offer a match and make profit-sharing contributions. The IRS limits plan contributions to a maximum of $61,000 per year. The profit-sharing feature may allow business owners to strategically fund their retirement accounts up to the $61,000 limit. 
  • Cash Balance Plan: This is a complicated retirement plan structure that is beyond the scope of what most businesses need. However, I do encounter some owners that would like to shelter large sums of money in a tax-advantaged way. This plan can allow a business owner to shelter hundreds of thousands of dollars. The viability of this plan needs to be determined on a one-on-one basis. Factors such as the number of staff, their ages, and their incomes all play into the funding calculation.

Other Benefits: Accounts like Health Savings Accounts and Dependent Care Flexible Spending Accounts may also be benefits worth considering. These accounts can offer you and your team tax savings today and help budget for two critical areas of life – health and childcare.

5. Do I have a succession plan? 

Your business is likely connected to your personal identity and financial success. It is important for your business to have a succession plan for death, incapacity, and retirement. Your succession plan should empower and position the new owner to continue the legacy you have built.

A buy-sell agreement can be an effective way to prepare for an unexpected event like death or disability. This agreement can ensure payment to you or your beneficiaries and allow operations to continue. 

As you approach retirement you should consider your exit plan. You should review tax ramifications of selling your business as there may be ways to structure the deal in advance to reduce taxes. You should familiarize yourself with how other companies in your industry are valued and the marketability of your business. You may want to enlist the help of a broker that can help you navigate finding a buyer. You should give yourself plenty of time to find the right successor.

Bottom Line

I will close with one final question: Do you have the time or interest to review, implement, and monitor the key financial topics reviewed in this article? Delegating can empower you to focus on your highest calling. A financial advisor, supported by a team of tax and insurance professionals, can structure a financial plan for your immediate and future needs. To top it off, the fees for our service may even be tax deductible as a business expense. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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