How Does Your Business Fit into Your Personal Financial Plan?

How Does Your Business Fit into Your Personal Financial Plan?

by Kent Smetters, April 2011

Planning for a solid financial future is challenging for almost anyone. But as a small business owner, it can sometimes feel overwhelming. The complications and uncertainties that come with entrepreneurship often discourage small business owners from planning their personal finances at all. But small business and personal finances should be viewed together.

Here are some of the most often overlooked steps that are necessary to have success in both.

Risk Management

  • Have a plan

You never know what kind of turns that life can throw at you, and in many cases that means selling, transferring or even closing your business. Having an “exit road map” prepared ahead of time will save you a great deal of money and heartache later on. If you intend to have someone eventually take over the business, then having a succession plan and timeline stated in advance will help make sure the process goes smoothly. 

  • Consider life insurance on key employees

While most small business are aware of the importance of insuring their tangible assets, they often overlook their most valuable assets—their employees. Just as many families need to think about what would happen in a worst-case scenario, so do businesses. Losing a key employee can be devastating and cash is often necessary to attract a new employee and to ensure that operations continue to run smoothly in the meantime.

  • Get group insurance

Check with your insurance broker to find out if your business qualifies for a group rate. Also check with any trade groups or associations where you are a member to see if they provide access to cheaper policies.

Integrating Personal Planning

  • Set up a retirement plan

One of the key areas where your business and personal finances come together is with your company's retirement plan. The right plan can save you on taxes while building your nest egg. There are a plethora of plans to choose from, including SEP IRAs and various forms of 401k. Your financial advisor can help you decide.

  • Choose the right business structure

Switching to an LLC, C corporation or S corporation may provide you with substantial additional tax savings, while providing your personal assets with an added layer of legal protection. A qualified advisor and CPA can help determine which entity best suits your business.

  • Find the right income/dividend mix

A closely related decision is how to take money out of your business. Calculate the short- and long-term effects of how various combinations of salary, dividends and benefits will affect you and your business. The results will vary greatly depending on your tax bracket, timing of earnings, and the structure of your business.

  • Valuation and estate planning

It's difficult to plan for your financial future without knowing the value of what you own. Working with a business valuation expert will give you an understanding of where you currently stand financially, which is a critical piece to any financial plan. For most small business owners, good estate planning can be achieved fairly simply by executing just a few documents. High net-worth individuals, however, might want to also consult an advisor, tax professional and an attorney to help optimize on taxes.

  • Hire your kids

Putting your children on the payroll can be a great way to shift income into their lower tax brackets, while avoiding estate and gift taxes. To avoid problems with the IRS, make sure that their salaries are in line with the work they are doing, and that you keep appropriate records.

Put it All Together with a Personal Financial Plan

Remember that the main purpose of your small business is to help ensure that you and your family have a successful personal financial plan. So take action today to see the entire picture of how your small business can help you achieve a stronger personal financial plan for you and your family.

About the author: Kent Smetters is The Boettner Chair Professor at The Wharton School at The University of Pennsylvania. He is also co-founder of Veritat Advisors, a mission-driven firm that makes objective and personalized financial planning affordable for all households.

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