By Paul West
“I built this place from the ground up.” Is there any statement more human, more American than that? Working in an organization where you – literally or figuratively – laid that first brick? But financial planning for small business owners, just like for an individual, is more complex and intricate than simply sweat equity and long hours.
Foundational decisions you make can save you – or cost you – thousands over time, no matter how many widgets you sell or clients you sign up. There are deep structure questions here that will be the difference between long-term growth or flash-in-the-pan success. You want a winning season, not a few lucky catches.
Let’s look through a few issues today that will help you get on good footing as a small business owner. We’ll break these down into protecting, planning and projecting for your company.
Protect – What are you building here?
One of the first questions to ask yourself when your dream of a small business comes close to reality is: What am I building here? What is my dream for the future?
Maybe you’re looking to run a small boutique business just long and well enough to sell it and retire comfortably. Maybe you’re hoping to grow and eventually franchise out – have a whole chain of businesses with your name on them.
If you have a reasonable idea of this vision, you can decide which kind of entity structure your business will have. Different structures have different tax treatments, which will help you budget for the future. Will it be a sole proprietorship, an LLC, an S Corp, a C Corp? The implications are important to talk through with an advisor and an attorney who specializes in small business.
Entity structure is like a brick in the bottom of a very large wall. If that first layer of bricks is off-center, it throws off everything else and – worst-case scenario – the whole thing comes crashing down. You could end up losing thousands over the years in unnecessary taxes and cheating yourself and your employees out of better profits.
There are also smaller tax loopholes that will help you keep more of the money you’ve worked hard to make:
- Renting/Owning – If you own your building, you can get a tax-deductible mortgage. There is literally no tax advantage to renting, so you have to discern that tipping point of taxes versus savings by renting.
- W-2 Wages – Increasing W-2 wages can give you tax advantage under certain entity structures
- Retirement plan contributions – You can make contributions to an IRA as both employee and employer, which raises your annual contribution limit considerably
These questions of structure have long-term legal and financial implications best discussed with financial and legal council. There are a lot of pitfalls here, so make sure you bring a guide who knows the terrain.
Plan – What Do People Say About Your People?
Patty Mccord, author and former Chief Talent Officer at Netflix, says companies should strive to be “a great place to be from.” The culture of that workplace should be well-known for fostering responsible, self-starting employees who had to prove themselves to keep their place. Creating a “great place to be from” is about more than simply providing a competitive paycheck to your employees.
Think through the retirement plans your company offers. Do they match the size of your company, the general age of your employees, their lifestyle/income needs? Are the plans too expensive and wrong-sized for your business?
Insurance is another part of planning for positive company culture. Supporting the medical and dental needs of your employees and their families engenders positivity and long-term loyalty – both of which are well worth the investment.
A Health Saving Account (HSA) program can be a great gift to your stakeholders. These accounts are triple tax-advantaged: you can deduct the deposits, it grows tax-free and it’s not taxed when withdrawn for qualified expenses. Enrollment in HSA programs has increased over 400% since their introduction in 2005. Employees have spoken – HSAs are a benefit that grows loyalty and morale.
Does the reputation of your employees proceed them, as Patty Mccord points out? Do people know that your stakeholders are loyal, positive and have been in an environment of freedom to explore and hone their gifts?
Project – Can you pass the reins?
You may have laid that first brick of the building in place, but eventually, someone else will be working there. The name on the door will change, and succession planning can never start too early.
Start with the first question: what am I building here? If you’re looking to build a legacy business, where your great-grandkids could someday work, your succession planning will take a certain shape. This changes if you’re supporting yourself with a boutique business, and especially if you know your kids aren’t interested. Then you could be grooming a trusted stakeholder, or you could be preparing to sell.
The worst thing you can do is nothing. Succession is much more complex than sliding the keys across the table to your son or daughter. There are financial, legal and relational dynamics at work. Get in touch with a fiduciary who will put your best interests first, and not just try to sell you commission-based products. Then write down your plan – it can be simple at first – just something concrete you can build on.
Plan for Your Passion
Protect, plan and project. Maybe your business started as a simple hobby that brought a few dollars your way. That passion is still the fuel everything runs on, but the implications of your organization are more complex now.
Just as it is in your personal life, financial planning for small business owners is intricate and far-reaching. A solid plan could be the difference between success and failure, no matter how much time you spend at the grindstone.
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