Financial Planning for Business Owners in Utah

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While financial planning can be beneficial for everyone, a financial plan should be very specific to you. Your financial plan may not look like your neighbor’s or even your spouse’s. Each person’s financial plan is a reflection of their unique lifestyle and financial needs.

As a business owner in Utah, your financial planning needs should not be met with the same strategies used by traditional employees of big companies. Business owners in Utah have different financial concerns and thus need unique planning strategies.

At Rock House Financial, we work with a lot of business owners. Below are some of the key elements relevant to financial planning for business owners in Utah.

Chapter 1

Taxes

Taxes are a common irritation for business owners. Every dollar that goes to taxes is one less dollar you have to run and grow your business. To lower your business income taxes this year, there are strategies you can take.

For example, you may be able to cut your tax bill by making any large purchases you have planned before the year-end. You can then use these expenses as a deduction against this year’s income.

Thanks to the Tax Cut and Jobs Act of 2017, you can potentially lower your business tax bill still further by taking advantage of the first-year depreciation benefit. The Act allows businesses to incur the full depreciation on certain assets, including computers, software, furniture, machinery and equipment, in the year it was bought. Consult with a tax advisor to make sure your purchases qualify.

If you expect next year to be a higher income year than this year, you may flip this strategy on its head by pushing invoices out early, delaying expenses and incurring depreciation gradually over an asset’s lifetime.

Another way to save on business income taxes while also providing for your future is by contributing to a qualified retirement plan. Business owners can set up their own 401(k) or SEP IRA plans that let them save up to 25 percent of their compensation, depending on the plan.

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Chapter 2

Selling a Business

When and how to sell a business can be a challenge for business owners. The first step to selling your business is getting it in its best shape for prospective buyers. This doesn’t just mean dusting the shelves and giving the tables a polish. Prospective buyers will want to look closely at your business’s financial statements and tax returns dating back at least three years. Consider working with an accountant to help you clean these documents up.

Boosting sales can help your financial image. Offload any bloated inventories and update your operating systems so your business glistens inside and out.

Once you have your business in peak shape under and over the hood, you should get a business valuation. Third-party services will do this for a fee, often in the range of $3,000 to $8,000. Or you can use a business broker, who will help with the entire sales process in exchange for a percentage commission of the sale price.

Regardless of when you’re planning to sell your business, you should have an exit plan in place well ahead of the sale. Small business owners too often end up getting driven into early retirement by unforeseen events, like illness or outside competition. To prevent such unexpected events from forcing you to make a hasty exit, have an exit plan in place ahead of time. This way, you’ll be able to transition as easily and peaceably into retirement as possible.

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Chapter 3

What Will Retirement Look Like?

Have you thought about what your retirement will look like? What it will really look like? Running a business can easily take up all of your time, leaving none for retirement planning. But the easiest way for retirement to come on your terms is if you have a plan.

Your exit strategy is an important part of your retirement plan. You can’t retire unless you have a plan for how you’ll step down from your business. Equally important, though, is what you’ll be stepping into once you do retire.

Start retirement planning by thinking about your ideal retirement lifestyle. What do you want to do in retirement? And where do you want to do it? If you can pin down what your retirement lifestyle will cost you, you’ll have an idea of how much income you’ll need in retirement. Then you can look for ways to generate this income after you stop working. A financial advisor can be a huge help in this process.

If you plan to sell your business before retirement, its value may represent a significant portion of your retirement savings. That said, you can’t rely entirely on a theoretical selling price to reach your saving goals. One of the biggest retirement planning mistakes business owners make is overestimating their business’s worth. To compensate for this risk, build up other assets, such as an investment portfolio, that can generate some of the income you’ll need in retirement.

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Chapter 4

Perks

One of the biggest challenges for new and growing businesses is attracting top talent. Employee perks and benefits can feel like the exclusive realm of Fortune 500 companies, but business owners of every size have the capacity to offer them.

Smart employees value retirement benefits and there is arguably no better retirement benefit going than the employer match. If you have a company 401(k) plan, consider offering a match to your employees.

You could also offer to match student loan repayments, which may appeal even more to younger, recently graduated employees. Just like a 401(k) match, you can offer to match a certain percentage of your employee’s student loan payments.

If you have a lot of new parents as employees, consider offering childcare perks. Childcare remains one of the biggest challenges for new parents. If you can offer onsite childcare, this is sure to be a major benefit. If not, you may be able to work out deals with local childcare facilities willing to offer discounts to your employees. Or you could provide extended parental leave or more flexible work options to make the transition from childless to parent easier.

Health Savings Accounts (HSAs) can also make a great employee perk. HSAs are savings accounts which allow participants of high deductible health insurance plans to use pre-tax dollars for qualified medical expenses. Money in HSAs can be invested in mutual funds. You can also take advantage of your business’s HSA to lower your own income tax bill.

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Chapter 5

Common Concerns

Attracting top talent is only one of the common concerns among business owners. Other concerns include choosing the right retirement plan and making ends meet.

One of the best perks of being a business owner is the variety of retirement plans available to you. Unfortunately, choosing among them can be difficult.

The most common small business retirement plans are SEP IRAs, SIMPLE IRAs, self-employed 401(k)s and traditional 401(k)s. Each has its merits and drawbacks.

SEP IRAs are great for their ease of set-up, wide investment options and flexible funding options. They do not, however, allow employee contributions.

SIMPLE IRAs are available to businesses with no more than 100 employees. They allow for a salary deferral plan and require minimal administration. SIMPLE IRAs have the lowest contribution limits of these small business retirement plans, at $13,500 in salary deferrals for employees in 2020.

Self-employed 401(k)s can be a great option if you have no employees other than your spouse. They offer higher contribution limits than SEP or SIMPLE IRAs (up to 25 percent of compensation up to $57,000 in 2020) and a wide range of investment options.

If you have employees and want the same high contribution limits, you could consider a regular 401(k) plan. These are generally best for businesses with more than 20 employees and require more administration than the IRA plans.

Discuss your situation with a financial advisor to understand your options and decide what is best for you.

If your business is still young, putting money toward retirement may feel like a far-off dream. Often more immediate concerns take precedence for business owners, such as simply generating enough revenue to keep the business afloat.

Business owners sometimes skip paying themselves to help their business grow. While this can help reduce your personal taxes, it can also inhibit your ability to save for retirement and other financial goals.

The drive for business growth can also compel you to rely too much on credit or overcommit your personal assets to the business. Carrying a balance on your business credit cards can create a future burden for your business as interest charges rack up.

Likewise, committing your personal assets to the business can put you and your family at risk. Make sure you protect yourself, your family and your assets as your business grows.

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Chapter 6

Protecting Your Assets

Businesses have a variety of assets, from the equipment to the people who help the business run. Protecting these assets should be of chief concern for business owners.

To protect your personal and business assets against a liability claim, keep your corporate documents in good order. You should also ensure employees’ job titles are consistent with their level of authority and that they don’t act beyond their intended authorization.

There are asset protection plans for business owners in limited liability insurance. This would come at an additional cost, but may be worth the peace of mind and higher level of protection.

Make sure to review your capitalization levels so your business doesn’t become cash heavy. You don’t want cash or non-business assets sitting on the firm’s balance sheet.

Balance sheet assets are not the only assets worth protecting, however. Business owners should also have strategies for protecting their business against the loss of key people.

Key Person Life and Disability Insurance will compensate your business in the event of the departure, disability or loss of key persons.

The last asset to protect in your business is yourself. Chances are your family relies on you for income and financial support. Who would take over running your business if something were to happen to you? Does your spouse know enough about your business to assume directorship?

Even if your partner could take over the daily running of your business, you may want to consider other means of providing financial support to your family if you were unable to work. Disability and life insurance can provide that additional support. It can also give you peace of mind that your family will be taken care of even in the worst-case scenario.

Discuss your options with a fiduciary financial advisor who has a legal responsibility to put your best interests first.

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