The financial issues confronting small business owners are anything but small. Often, you are juggling the intricacies of day-to-day operations while managing marketing, real estate, hiring, and a volatile market. And it doesn’t seem easier after you’ve survived the start-up phase!
As your business grows, both the opportunities and pitfalls seem to multiply. While cash flow and day-to-day operations may be more stable, there are new complex business decisions to make concerning taxes, real estate, and retirement planning. At this stage, business owners need to shift their attention from accumulating revenue to efficiently managing and diversifying their assets. A financial advisor can help you master BOTH your business and personal finances by navigating those decisions.
Taxes
Once you have passed the start-up phase and finally understand the basics of the US tax code (no small feat!), it can be tempting to let taxes take a back burner. However, there are additional tax planning opportunities available as your business begins to expand.
One important area to explore is retirement and benefit planning. At this stage, you are likely hiring additional people, so attracting and retaining talent is more important.
Hidden Tax Benefits
An experienced financial advisor can help you find tax relief in the normal, day-to-day functions of your business.
Need new equipment?
Consider purchasing at the end of the year and taking 100% bonus depreciation, especially if you are having a profitable year and know an equipment need is ahead.
Do you have worthless property?
Consider abandoning it and writing off the loss as ordinary rather than selling it and taking a capital loss, which is limited to only $3000/year.
Want to save on payroll taxes?
Be sure you set up an accountable plan for employee reimbursement.
You may want to consider offering a cost-effective retirement plan, such as a SIMPLE IRA or a Safe Harbor 401(k).
To attract younger workers, you could offer student loan assistance, which provides up to $5250/year tax-free.
Of course, you should also consider whether health, life, and disability insurance would make sense for your team.
At this point, you may be quite profitable, so be sure to pay yourself a reasonable wage. Not only does this satisfy the IRS, but it also allows you to take full advantage of retirement plan deferral limits.
Estate Planning
If your net worth is between $2-10m, it’s a good time to think about setting up certain types of trusts. Trusts can be used to provide an income stream to your family, protect assets from creditors or divorce, protect heirs from themselves, and provide for charitable organizations or future generations.
You may also want to revisit how assets are titled. If you have personal liability from the business, you may want to title some things in your spouse’s name for protection.
It may not be too early to consider gifting. Gifting can help reduce your estate size as well as give you the opportunity to see loved ones benefit from your gift while you are still living. A financial advisor can help you strategize to make sure your business, tax burden, and loved ones all benefit.
Investing
As your business grows, you should shift your focus to diversification. (Remember: concentrate to build wealth, diversify to keep it!) Work with your financial advisor to adjust your asset allocation and invest in strategies that make sense both for your personal goals and your business’s stability.
This is also the time to consider enhanced retirement offerings.
If you are over 40, consider a cash balance plan, which allows you to contribute over $50,000 per year. This allows for a predictable fixed return and positive cash flow. Make sure to diversify to preserve what’s been accumulated already.
As you expand, you may need additional or larger properties. A 1031 exchange allows you to swap one piece of real estate investment property for another and defer the capital gains tax on the sale of the original property. It also allows you to diversify your real estate portfolio by spreading risk among different property types. (For a 1031 exchange, properties must be considered like-kind.)
Best Time to Invest? Yesterday.
But the second-best time to start is now!
Time is the one thing you can never get back, so make sure to prioritize saving and investing.
Set aside money for retirement in a Simple IRA or Roth IRA. Remember the “Rule of 72”. Divide 72 by interest rate = years to double.
Growth is direct evidence of your hard work and decisions during those early days of starting your business. You can preserve that success by transitioning to a new goal of sustaining and diversifying your assets. The decisions you make now won’t just keep your business running; they can create the path you use to step away from your business. This expansion stage can help provide you and your family with financial security in the future. Ready to get started? We’re here to help!
Melissa Bane, CPA, PFS®, CFP®, ChFC
Senior Private Client Advisor
As a Senior Private Client Advisor, Melissa’s top priority is to serve her clients. Her proactive approach blends thirty years of industry experience with compassion and understanding. She specializes in developing holistic financial solutions for business owners and helping women investors establish security and build wealth.
The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
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