Top 12 Unique Financial Planning Aspects for Business Owners

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Top 12 Unique Financial Planning Aspects for Business Owners

While there are many fundamentals of financial planning that extend across the various types of individuals such as executives, professional service providers or W-2 employees, there are some aspects specific only to business owners. We have summarized what we believe to be the top 12 areas that should be considered by business owners. Note that the first two are what we would consider to be “deal killers”. These are areas of planning that are so important that if not considered, a transaction may fail, or the business owner may have significant regret post transaction. The other fundamental areas are more related to efficiencies, or areas of planning to address in order to maximize the outcome for the business owner and his family.


1. Retirement Planning - Calculating Your Number
Business owners need to know how much they spend (including what runs through business) so a calculation can be run to determine how much capital is required to continue their current lifestyle after the sale of their business. The calculation also needs to incorporate planning around other specific goals such as increased spending, second home, education funding, charitable giving, wealth transfer (in life or at death), future business ventures, etc.

Why this number is so important? It paints the picture of what the finish line looks like and helps the owner and advisory team understand the required net proceeds and the structure of payment of the proceeds.  Personal retirement planning will help set the timing of the transition and provide the owner with the required baseline to evaluate third-party offers and even the cash flow risk of an internal transfer.  Funding needs are often viewed in terms of tiers to understand what is needed versus what is desired in order of importance to the business owner. These goals will likely change over time and need to be tracked.

2. Psychology of Transition
Executives and W-2 employees have more capacity to build a plan and/or understanding of what their post business life will look like.  Often, this is because they are not emotionally attached to “someone else’s” business.   Many are “more than ready” to leave the corporate world.   Not so for the business owner.   

Business owners see their contribution to the world, society and community as the value they have built over years.  Their ability to translate that value creation into a post-transition life takes longer for them to figure out. A critical element of planning for the business owner includes helping them build a set of diversified activities that don’t require the intense individual focus the business required.   


3. Choosing a Business Entity/How You are Paid and Taxed
Choosing a business entity - such as sole proprietorship, partnership, LLC, S-Corp, C-Corp - is a very important decision and may depend on a variety of factors including the following:

  • Tax Treatment
  • Ability to raise capital
  • Separation of ownership and management
  • Limited liability protection
  • Transferability of ownership
  • Ease of formation

Depending on the entity, there can be a variety of ways an owner gets paid including salary/W2 income, profit distributions, dividends, or corporate officer notes. Each of these types of “payment” has a different tax consequence in the year of receipt, and corporate officer notes may have a tax consequence down the road at the time of sale.

4. Personal Cash Liquidity Needs
A general rule of thumb for personal cash liquidity is keeping 30 to 90 days of expenses on hand in cash reserves. Most employees can find another job or deal with unknown personal expenses within this reasonable period of time. However, business owners have a different level of business uncertainty and capital needs along with a longer period of cash shortages. Knowing the sensitivity of the business profitability and working capital needs (including CAPEX) is critical to knowing how many months personal spending needs to be in reserve, outside the business.  

5. Compensation vs. Profitability/Distributions
Many business owners lack an understanding of what their role within the business should pay as compensation (versus what they are actually being paid) and what their ownership distributions should return relative to what the market expects.  In addition, they have the benefit of having some of their lifestyle expenses paid for by their business as legitimate tax deductions.  This dynamic can lead to an expectation or knowledge gap regarding what they actually need for living post transition and what their business will sell for net of taxes.  

6. Investing in the Stock Market and Understanding Your Risk Tolerance
Business owners have a healthy and acute understanding of their unique risk and reward within their business model.  Generally, that does not translate to portfolio returns after a sale. Business owners tend to want to adjust to adverse trends immediately as they would in their business.  And while this strategy may be effective with their business, in the world of portfolio returns, it can damage their long-term success. 

With portfolio investing, diversification and a long-term perspective are keys to success as the markets go through up and down cycles. A critical concept for the long-term success of business owners is that you concentrate your resources to build wealth (i.e. the business), and you diversify your wealth to keep it.  

7. Manage Your Tax Bill While Operating Your Business
While there are many tax planning strategies available to all taxpayers, there are a number of strategies available only to business owners while operating their business. These strategies specific to business owners include:

  • Being Smart with Your Deductions
    Business owners have the ability to work with their CPA to determine what personal expenses can be deemed business related and therefore deductible.
  • Timing of Income
    In some cases, business owners have some level of control as to when they recognize income which allows for more flexibility on when they are taxed.  But exercise caution here because being too aggressive with recognizing or deferring income could negatively impact a future sale.
  • Family Members on Payroll
    Assuming legitimate services for the company are provided, business owners have the flexibility to add family members to their payroll giving them the opportunity to contribute to company retirement plans, receive company matches and/or fund Roth IRAs.
  • Qualified Business Income Planning
    Among the most complex aspects of current tax legislation is a special deduction allowed specifically for business owners of pass-through entities called the Qualified Business Income Deduction (QBID).  While this deduction may be phased out for high income earners in certain service-based businesses, it allows for up to a 20% deduction of qualified business income.  Thus, when business owners are reviewing their business structure, they must consider the implications of this deduction.  In addition, business owners should re-evaluate their retirement plan structure each year as this deduction can reduce the benefits some plans offer.  Finally, this deduction has very specific requirements that must be met before any real estate activities will qualify.
  • Cost Segregation and Asset Retirement
    When business owners add capital assets to expand operations, it is often advantageous to break out the various components of these assets for the purpose of deprecation. The reason is that many long-term assets such as real estate can only be depreciated over a long period of time. However, most large assets have components that may be depreciated much faster if they are broken out and depreciated separately. Good examples of this may be items such as lighting, flooring, and appliances. Also, while many large assets purchases (such as real estate) don’t break out all the various components on the closing statement, these components may still be broken out by the purchaser. In this case, the largest reasonable value should be assigned to assets with shorter depreciable lives and the lowers reasonable value should be assigned to longer term assets such as buildings or land. Taking advantage of these shorter depreciable lives can dramatically lower your income taxes.

    Finally, business owners should review their schedule of assets and depreciation each year to ensure all assets listed are still being utilized.  Once an asset has been fully depreciated, the owner should look for opportunities to retire the asset; removing it from the books of the business.  The reason for this is that when the owner eventually sells the business, any gain realized as a result of depreciated assets may be considered ordinary income rather than capital gains.  This difference can double the tax rate paid on these gains.

  • Qualified Retirements Plans (401k/profit sharing, SEP, SIMPLE, cash balance, defined benefit plan
    There are several qualified retirement plans that can allow business owners to make tax-deferred contributions to lower current income and save for retirement while attracting and retaining top talent. The choice of which plan makes the most sense is highly driven by factors such as how much the owner wants to contribute, the number of employees and the age of employees. In many cases, coupling these types of plans can allow owners to defer significant amounts of income. Depending on the design of the plan, in many cases fees can be deducted as a business expense to save on taxes and allow for additional growth in the retirement plan(s).
  • Qualified Small Business Stock (QSB)
    A “Qualified” Small Business for the purpose of this tax provision is an active domestic C-Corporation whose gross assets do not exceed $50 Million at its original stock issuance.  While there are many other considerations regarding business structure, qualifying as Small Business Stock has significant tax savings implications for the owner/investor.  Specifically, if the owner/investor has met certain requirements, they may be eligible to exclude 100% of the gains from selling this stock, up to a cap of $10 Million or 10 times the original investment, whichever is greater.
  • Opportunity Zones
    Opportunity Zones (OZs) were created under the recent Tax Cuts and Jobs Act with a goal of incenting investment into low-income areas around the country nominated by each state. The basic dynamics are that investors who have recently realized a capital gain can invest this gain in an OZ through a Qualified Opportunity Fund and defer having to pay taxes on the gain. If the assets remain in the OZ investment for 5 years, 10% of the original gain is eliminated. If the assets remain in the OZ investment for 7 years, 15% of the original gain is eliminated. The tax on the remaining 85% of the original gain must be paid no later December of 2026.

    Finally, if the assets remain in the fund for 10 years, then any gains specifically resulting from the OZ Fund are exempt from income tax. When evaluating this strategy, it is important to focus on the quality of the underlying investments in addition to the tax benefits.

  • Captive Insurance Companies
    A Captive Insurance Company (CIC) is a licensed insurance company created as an alternative to self-insurance. The primary purpose is to insure against the risks of its owners. The owners/insured also benefits from the tax-deductible premium as well as any underwriting profits. This strategy is complex and requires a great deal of ongoing management and expense. Additionally, CICs have recently been on the radar of the IRS so there is additional risk of audit.
  • Georgia Heart and Student Scholarship Organization Tax Credits
    While these credits have lost some popularity due to a recent IRS ruling, they continue to allow taxpayers to effectively redirect a portion of their state tax liability. By using these credits, businesses and individuals who would like to support rural hospitals or private K-12 schools in the state of Georgia, can direct funds to institutions they care about, and receive their entire contribution back when they file their state tax return. Furthermore, in some circumstances, businesses may also be able to contribute to these organizations and receive both a tax deduction (ie. marketing expense) while also receiving their funds back as a result of the state tax credit.
  • Georgia Retraining Tax Credit
    Georgia offers a retraining tax credit of up to an annual maximum of $1,250 per employee.  This credit can be used to help offset the cost of instructors, teaching materials, wages during training, and even reasonable travel expenses.  Furthermore, can be used to offset up to half of a company’s Georgia income tax liability.  And while expenses must be approved by the Technical College System of GA in order to qualify, for many Georgia businesses, taking advantage of this credit can save thousands in annual taxes.

Other tax planning strategies used more regularly by all types of taxpayers include:

  • Georgia Film and Low-Income Housing Tax Credits 
  • Charitable Giving/Donor Advised Funds 
  • Syndicated Conservation Easements (Take caution as this is now on the radar of the IRS.)

8. Charitable Planning Prior to Sale
Business owners have a unique opportunity to do pre-planned charitable giving that reduces their transaction taxes, which will likely include both ordinary and capital gains. Proper planning can reduce the ordinary income taxes as well as capital gain taxes and provide the owner years of giving to worthy causes in the future.  In many cases, a donor advised fund (DAF) is used in this strategy. When highly appreciated assets – such as an interest in the business – are contributed then sold inside the DAF as part of a sale, the ordinary income or capital gain associated with that interest can be avoided. And this savings is in addition to the charitable deduction for the fair market value of the business interest! If designed correctly, this strategy can be highly impactful both from a tax perspective as well as the perspective of achieving charitable giving goals.

9. Managing Debt 
Business owners have a unique relationship between personal and business debt.  Personal planning should include an understanding of key business debt ratios

  • Operating Leverage:  Contribution/Fixed Cost
    The percentage of fixed costs relative too all costs is called operating leverage, and is calculated by dividing contribution, which is the gross margin (sales minus cost of goods sold) minus variable costs (all costs that are not fixed costs that fluctuate with sales), by fixed costs.

    A business that has an operating leverage of 1 is generating just enough revenue to pay for its fixed costs. This would mean that there is no return for the owners. Anything over 1 is indication of profit.

  • Financial Leverage:  Total Capital Employed/Shareholder’s Equity
    The higher a business’s financial leverage, the riskier it is because there is more debt to be repaid.
  • Total Leverage:  Operating Leverage x Financial Leverage
    Total leverage is calculated by multiplying the operating leverage by the financial leverage. Total leverage represents the total risk that a company carries in its present business. Total leverage tells you the total effect a given change in the business should have on the equity owners.

    In general, a well-run, conservatively managed American company typically keeps the total-leverage under 5.

  • Other Key Leverage Ratios include:
    Debt-to-equity Ratio – Financial structural risk
    Current Ratio and Quick Ratio - Liquidity

Business owners must keep in mind that while these ratios have direct impacts on how efficiently their business operates, they will also be reviewed by a prospective buyer as a part of their due diligence.

10. Continuity Planning
Planning for how to keep operations/cash flow going and key employees in place during a disaster – such as the death or disability of an owner, a natural disaster, etc. - is critical. Plans will look very different depending on whether the business is a sole proprietorship, or a business owned by multiple owners.

Business continuity plans must be documented in writing and communicated to the other key employees at the company. The plan should include instructions surrounding areas such as:

  • Operating Agreement 
  • Buy/Sell Agreement 
  • Assignment of key roles and responsibilities including instructions for management transition
  • Contact information for key customers and vendors as well as a communications plan for these relationships
  • Contact information for key professionals such as attorneys and CPAs
  • Key financial information including instructions for maintaining working capital and/or lines of credit
  • Life, Disability, Property and Casualty and other business insurance planning
  • Relevant passwords for critical operating accounts as well as instructions for who will have the authority to transact on these accounts.  (In some situations, this may require a Financial Power of Attorney.)
  • Incentive planning for key employees

As it relates to planning for the event of death or disability, it is also important for formal written instructions to be prepared for the family including specific actions that should be taken in the short term after such event and what planning should be done for the long term such as a third-party sale, strategic partnership with a competitor, or continued operations.

With family-owned businesses where there are other family members active in the business, it is important to document the vision and values of the founding family member as well as have a framework in place for decision making and ongoing family governance.

11. Managing Risk
Managing risk is one of the most critical elements of planning for business owners. Not paying attention to this area can put the business owner and his family at risk for a lower probability but high impact event that can be devastating. This couples directly with the continuity planning mentioned above.   Several important tactics include:

  • Entity Separation - Business owners often own one or more operational entities and may own property in the course of their business. Titling these elements as different business entities allows for the isolation of risk should a liability lawsuit or other issue arise within one of them.
  • Life Insurance and Disability Insurance Needs - Insurance needs are much different for the business owner, and this ties to the continuity issues above. Key man insurance is often used within the business to bridge the gap of the loss of an important key executive and the loss of business or profitability as a result. Additionally, life insurance and disability insurance are used to fund buy/sell agreements to provide liquidity to cash out an owner in the event of a death or permanent disability per the terms of the agreement.

    If the business owner plans to pass the ownership to another family member(s) at death, permanent life insurance may be an option to cover any potential estate tax liability. This will be dependent of the value of the business, the business owner’s estate value at death, and the estate tax laws in place in the year of the owner’s death.  

    Life insurance is also frequently used to equalize bequests at the death of the owner when one or more family members are not inheriting the business.

  • Liability Insurance - Business owners may have a higher risk for a liability lawsuit against the business due to the nature of their business's operations, or even personally due to their higher profile. Additionally, business owners who serve on non-profit or other boards may not be aware that they could be subject to a personal liability lawsuit pursuant to the operations of the non-profit (even if they are not directly involved) without the proper coverage. Having the appropriate levels and coverage of liability insurance is key in protecting against these risks.
  • Specialized Insurance Coverage - Some risks related to the business that are not addressed with the legal structure such as interruption of business due to a disaster or loss of business property can be protected against using specialized insurance coverage that is specific to the business. If the business has employees, worker’s compensation coverage becomes necessary as well.
  • Keeping personal capital in the business - Many business owners keep excess personal capital in the business because there is a perception of a higher rate of return and control within the business when compared to an option of investing in a diversified portfolio. The biggest risk in doing this is while in the business, an owner’s personal capital is subject to liability and creditor claims related to the business. Additionally, if an owner plans to sell to a third party, the buyer will review several years of financial statements to determine how much working capital has been maintained in the business over time. This will drive the negotiations for how much working capital should be left in the business at the time of sale. Leaving excess capital in the business over time could put the seller in a difficult position during these negotiations.
  • Fiduciary Responsibility with Company Retirement Plans - With qualified plans in the business, the business owner (serving as plan administrator) can be subject to risk related to their fiduciary duties in this role. As the plan fiduciary, the owner is responsible to prudently select and monitor investment options, performance, and fees in the plans at the level of a trained professional. Many business owners choose to work with an investment advisor to take this responsibility in either a 3(21) or 3(38) fiduciary capacity to limit their risk in this area.

12. Opportunities in Estate Planning
Based on the current estate tax law, each person can transfer up to a cumulative $11.4M (2019) of wealth during their lifetime or at death to individuals (other than their spouse or charity) using their estate exemption amount. Any unused exemption amount is now portable, or transferable, to the surviving spouse at the first death assuming the correct paperwork is filed.

There are a variety of wealth transfer strategies that may be utilized to transfer wealth while minimizing the use of the estate tax exemption amount that are particularly effective with business owners. These strategies include:

  • Application of a Minority Discount – This refers to the reduction in the value of a business interest below the fair market value due to the minority interest and the lack of control. Using this technique allows for more tax-efficient transfers of business interests to family members or key employees.
  • Grantor Retained Annuity Trusts (GRATs) – Using this strategy, a business owner contributes an interest in the business into an irrevocable trust called a GRAT. The owner retains the right to the original value of the assets plus a rate of return based on the IRS 7520 rate for a specified time period. As long as the business owner does not die before the trust expires, the difference between the original gift and the appreciated value transfers to the beneficiary tax-free. This is especially effective with businesses that are appreciating rapidly.
  • Installment Sale to Intentionally Defective Grantor Trusts (IDGTs) – For families with an estate tax issue, IDGTs can be used to transfer the value of an asset as well as any future appreciation out of an individual’s estate. The income from this unique type of the trust is taxable to the grantor for income tax purposes, but the assets are not included in the grantor’s estate for estate tax purposes. Typically, a small “seed” gift of cash is made to the trust from the grantor. Next, an interest in the business is sold to the IDGT in exchange for a low-interest promissory note. The seed money pays the interest payments, and the interest in the business can be sold without triggering capital gains tax (because the grantor is selling the interest to himself). The tax savings can be leveraged by applying a minority discount to the value of the interest at the time of sale.
  • Charitable Remainder Trusts (CRTs)/Charitable Lead Trusts (CLTs) – Charitable Trusts are irrevocable trusts with both income and remainder beneficiaries that involve a qualified charity. With a Charitable Remainder Trust, a taxpayer contributes appreciated assets into the trust. The taxpayer (and their spouse, in many cases) receive a calculated amount of income each year for their joint lifetimes, then at the second death the remainder trust value is contributed to charity. The pro-rata charitable deduction is taken at the time the trust is formed.

    With a Charitable Lead Trust, the charity receives a calculated amount of income each year for a specified time period, then at the second death the remainder trust value is transferred to a named beneficiary or beneficiaries (typically children). The pro-rata charitable deduction is taken at the time the trust is formed.

Like other wealthy individuals, business owners must decide how much is enough for the kids, and when they should receive it as the value of the assets becomes significant. Typical estate plans include the following documents:  

  • Will 
  • Financial Power of Attorney 
  • Advance Directive for Healthcare 

Unless it is expected that a spouse would step into the business upon the disability of the business owner, there is often a second Springing Financial Power of Attorney in place for business-related financial matters.

Business owners have financial planning requirements that require special knowledge in order to maximize personal wealth during business ownership and after the business has been successfully transferred to someone else.  Look for additional information amplifying each of the 12 unique financial planning areas in future blog posts and white papers. 


This information provided is for informational purposes only. It has been derived from sources believed to be factual and reliable and is subject to change based on changes to the tax code and other laws and regulations. The information is provided as a guide to assist you in your personal financial planning.  It should not be construed as specific tax or legal advice.  Please consult a tax professional, attorney, or other financial professional with questions about your specific situation.