Financial Planning for Business Owners in Utah
Small business owners are the lifeblood of the US economy. While it can be beneficial for everyone, financial planning for business owners is critical.
I recall decades ago when I had my first business. It was a milestone when I hired my first employees – but I wish I had given more thought to how I was going to afford them! I remember so clearly being sick to my stomach – literally to the point of vomiting – the night before the first payroll was due. You can ask my wife.
As a financial advisor in Davis County, we understand when Utah business owners have anxiety over their finances – whether it is managing to save for retirement while running your business at the same time, navigating the taxes a business owner must pay, or even figuring out your exit strategy (how to sell a business in Utah can be a complicated question).
A small business owner’s financial planning needs should not be met with the same strategies used by traditional employees of big companies. Business owners in Utah and beyond 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, our home state, as well as across the country.
Taxes are a common source of 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, there are strategies you can follow.
Let’s say you are looking at your profits for the year in the late fall, and you realize you’ve had a great year. There may be advantages to reducing some of the profits 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 instead of taking them as a deduction in future years when the profits may not be as high.
Thanks to the Tax Cut and Jobs Act of 2017, you can potentially lower your business tax 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.
Selling a Business
When and how to sell a business can be a challenge for business owners. The first step in your business exit strategy 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 and profits 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.
Whether you are selling a business in Utah or any location in the country, and 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.
What Will Retirement Look Like?
Have you thought about what your retirement will look like after you sell your business? What it will really look like?
Many business owners in Utah and across the country haven’t taken the time to consider how they would actually retire. 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 to incorporate it into your business owner financial plan.
Your business exit strategy is an important part of your retirement plan. You can’t retire unless you have a financial plan for how you’ll sell your business and step down. 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 or real estate portfolio, that can generate some of the income you’ll need in retirement.
One of the biggest challenges for new and growing businesses is attracting top talent.
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. As expenses are paid with pre-tax dollars, this could be an important part of your business owner financial planning.
One of the best perks of being a business owner is the variety of retirement plans available to you. Unfortunately, choosing the right retirement plan for your business 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 $14,000 in salary deferrals for employees in 2022.
- 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 $61,000 in 2022) 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.
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 growing your business.
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, and that is why financial planning for business owners is so critical. Discuss your situation with a financial advisor to understand your options and decide what is best for you.
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 and a major component of any financial plan for a business owner.
To protect your personal and business assets against a liability claim, keep your corporate documents in good order. This may include:
- Articles of incorporation or organization
- Business charter
- Company bylaws
- Operating agreement
- Non-disclosure agreements
- Non-compete agreements
- Company policies/handbook
- Merger/acquisition agreements
Business owners should consider liability insurance as a way to protect their business and personal assets. This would come at an additional cost, but may be worth the peace of mind and higher level of protection.
It’s also important to stay on top of your financial statements as a business. 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.
For all these reasons, financial planning for business owners is of highest importance. Discuss your options with a fiduciary financial advisor who has a legal responsibility to put your best interests first.
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