June 24, 2021
You have drive. You have independence.
You’ve started a small business, led a company through a world of change, and overcame a variety of challenges, from operational to financial challenges.
As a small business owner and executive, there is likely an intersection between building a legacy and protecting your business and how you carefully manage your personal finances, including income tax planning, risk management, retirement planning, and estate planning.
Income tax planning
A company’s legal structure determines its income tax environment. Most small businesses operate as a sole proprietorship, partnership, limited liability company (LLC), or S-company taxed corporation. This means that the company’s taxable income goes into the owner’s tax return and is taxed at the owner’s federal tax rate, which can be up to 37 percent.
There is an advantageous provision in federal tax law that allows a deduction of up to 20% when determining the income passed on to the owner. However – not all organizations and business owners are eligible as other income, deductions, or losses from non-business sources can affect this opportunity. Working with an advisor who can coordinate the planning between the small business and the owner’s overall tax situation can be helpful in minimizing the income tax outflow.
We tend to insure risks on an individual basis, including health, disability, death and home insurance. But the risks a small business owner faces will likely dictate additional insurance.
The type of business a small business operates in can be the first line of defense against some risks that could put the owner’s assets at risk, such as: B. as a company or LLC.
Other risks may require special insurance coverage, such as B. insurance against damage caused by business interruption, damage in connection with company property and damage caused by work-related accidents involving employees. A business insurance specialist is critical to assessing these and other risks.
Many small business owners view the business they have built as their retirement plan, and as a result put much of their savings back into the business over the years as it grows. This can help keep the business going.
However, it is also important as a small business owner to have some diversification in your retirement planning, especially through measures to build liquidity outside of the company. For example, establishing a qualified retirement plan like 401 (k) can give an owner the opportunity to contribute far more dollars to their benefit than a non-business owner could deposit into an IRA account. It is important as a small business owner to navigate the complexities of retirement planning, even if you plan to work indefinitely. Working with a certified financial planner can help small business owners.
This year there is a very generous inheritance and gift tax exemption of $ 11.7 million per person. This may change based on the legislative proposals discussed by Congress.
While estate planning may not be powered by inheritance tax savings right now, a bigger problem for a small business owner can be business continuity if the owner is handicapped or dies. A documented succession plan can be extremely valuable in maintaining the value of the business you have built. Life and / or disability insurance can also play a role in this planning, as in the event of the death or disability of an owner there is an urgent need to provide income and liquidity to the owner or the owner’s family without the need for a “forced” sale is the company’s.
Small business owners should also focus on current estate planning documents, including a will and power of attorney, expressing their current desires for the transfer of business ownership and control in the event of death or disability.
Owning a small business can be so many things: a dream come true, a stressful but rewarding experience, something to be proud of, something to worry about. It can add some levels of complexity to financial planning as an owner, but that complexity can be tackled with a trusted team of advisors including accountants, lawyers, and financial planners.
Thomas K. Williams is CEO, Partner and Senior Wealth Adviser at Domani Wealth.