13 Personal Finance Tips for Any Small Business Owner

Many small business owners make the mistake of relying solely on their business for their retirement, but there are better ways to secure a comfortable financial future while building a going concern. They include taking advantage of new tax laws, picking the right savings plans and even hiring your children.

Keep reading for valuable information from the experts. Small business experts from across the nation have contributed to this list of 13 personal finance tips that every small business owner can use.

Financial tips for small business owners
1. Make sure you have adequate personal life and disability insurance.

Over the last two and a half decades, one in 12 small business firms has closed every year, in many cases for personal reasons such as illness, injury or even death. Although an LLC structure can protect your personal property, additional personal insurance can safeguard both your personal and business assets from catastrophes. Discuss with your broker how to ensure you have sufficient coverage to pay the mortgage, car payments and other expenses in the event you are disabled or lose your income.

If you are a member of a professional or industry association you might qualify for a group rate, which could be cheaper than paying for an individual premium. If you have employees, a provider might reduce rates for voluntary group coverage for any participating employees.

If you are a partner, disability and life insurance becomes more complex, and you will have to come to an agreement regarding the possibility of a buyout in the event of disability. A buy-sell agreement is a good idea.

2. Make sure you’re saving for your retirement.

Many entrepreneurs rely solely on their business as a retirement plan, essentially putting all of their nest eggs in one basket. Instead, pay into an SEP (simplified employee pension) IRA or solo 401k account, said Angela Dorsey, a California-based certified financial planner. Both provide tax benefits and are designed for small business owners or those who are self-employed.

A small business owner and employees can contribute up to 25 percent — or $55,000, whichever is less — to a SEP IRA in 2018. A solo 401k account is geared toward sole proprietors with no employees, and the contribution guidelines are the same as those for an SEP IRA.

Having a retirement account that’s not sponsored by the business provides some insurance in case the business fails. “By contributing to an SEP account or a solo 401k account, small business owners are saving for retirement while also reducing their taxes,” Dorsey said.

3. Take advantage of new tax savings opportunities.

The 2017 Tax Cuts and Jobs Act heralded substantial tax benefits for small business owners, specifically the pass-through deduction that enables small business owners can deduct up to 20 percent of their business income.

There are additional ways to leverage tax advantages using retirement and 401k accounts, profit-sharing plans, cash-balance pension plans and leased business vehicles for business use, according to Kevin Reardon, a certified financial planner and small business owner in Pewaukee, Wis.

“By deferring money during high tax years and withdrawing during low tax years [such as retirement] you take advantage of a tax arbitrage opportunity,” Reardon said.

4. Get an expert AAA team — accountant, attorney and adviser.

A competent financial and legal team will have a more objective and holistic approach to your finances, said Derek M. Tuz, certified financial planner with Aegis Financial Partners. “Without coordination,” Tuz said, “how do you know how a change in the tax law will affect the other areas of the small business owner’s life?”

When selecting your team, choose personnel with experience with businesses your size and larger so they can still help you when your business grows, said Leon LaBrecque, a lawyer, certified public accountant and certified financial planner in Troy, Mich. But avoid massive firms that cater to larger companies because your business could get lost in the mix. “Think Goldilocks: not too big, not too small, but just right,” LaBrecque said.

5. Hire your children.

Hiring your children will pay dividends in the future, according to Sean Moore, certified financial planner and chartered financial consultant in Boca Raton, Fla. By working in a family business, young adults “appreciate what their parents do to provide for the family and realize what their own strengths and weaknesses are in the ‘real’ world,’” Moore said.

And, employing children is a way to shift income to the next generation at a lower tax rate, according to Reardon. “By employing children, you can begin funding Roth IRAs as long as they have wages. Some of my clients employ children as early as age 12,” he said.

6. Have enough cash on hand.

For a small business owner, how long it can take to break even can be unpredictable, and you need an adequate float in the meantime. “Make sure you keep enough cash on hand to grow the business,” said Matt Chancey, certified financial planner in Tampa, Fla. “It will take more cash than you anticipate and longer to be cash-flow-positive than you planned.”

Business owners often use all of their money to reinvest in the business, but then “get killed in a recession or market decline,” LaBrecque said. “Imagine how much better it is when you have a pool set up to weather the downturn?”

7. Protect your personal assets.

Structure your business in a way that protects your personal assets. One way is to use limited liability against personal assets, said Sallie Mullins Thompson, a New York-based CPA, financial planner and tax strategist.

“A sole proprietorship does not give any protection in the event of bankruptcy for personal assets and nor do partnerships,” Thompson said. “What does are limited liability companies or LLCs, which most states allow for a single business owner.” Some LLC partnerships also provide some protection for personal assets.

A company can form as an S corporation and opt for S selection. In some cases, this enables an owner to pass profits and losses through their personal income without being taxed at the corporate rate.

“If you are incorporated and you do not take the S selection, that means that any distributions to the shareholders are taxed twice; first at the regular corporation level and then again when they are distributed to the shareholder as dividends,” Mullins said.

According to Mullins, the strongest protection is a regular corporation with S selection because income after expenses passes directly through to the owners and is not taxed at the company level. Income is taxed at a personal level, and the structure protects personal assets.

8. Keep business and personal finances separate.

Keep business and personal expenses separate by having a business bank account and a business credit card or card dedicated for business use only, Thompson said. This will help you keep track of expenses.

“It’s important to know what you are putting into the business and to keep it separate from your personal transactions,” Thompson said.

For instance, if you want to sell your business, it’s easier to value it if your business finances aren’t comingling with your personal accounts. Another good reason? It’ll help if the IRS audits you. If your business and personal expenses are mixed in the same account,

“The IRS is probably going to disallow all your business expenses,” Thompson said.

9. Use health saving accounts as a saving vehicle.

Contributing pretax dollars to an HSA reduces your taxable income and lowers your taxes. You get the financial benefit of the dollars without paying taxes on them, and any contributions you make are deductible at the end of the year.

“Health insurance is an above-the-line deduction,” Reardon said, “and HSAs can be used to save or as a medical expense vehicle.”

Withdrawals from an HSA account are not considered income and are not taxed, according to LaBrecque. “If you have medical expenses to pay, you can deduct any cash withdrawals that you use from your HSA from your income tax-free,” he said.

10. Get to know and like your banker.

If business slows and your profit and loss statements are dismal, it can be hard to find funding. If you have established a strong relationship with a banker, you might have better luck.

“Bankers want to loan you money, but not when you need it,” LaBrecque said. By developing a relationship with your banker when your business is healthy, your banker will have a more objective view of your financial situation and be more inclined to extend financing when you need it most.

11. Mature small businesses need risk and succession planning.

A mature business must plan an exit strategy early and years ahead of retirement because selling the business might not be so easy. In some cases, a partner may not be able to buy out another, said Dennis Nolte, a certified financial planner in Oviedo, Fla., who works with many relationship-based, small businesses, such as attorneys and accountants. Other times, potential buyers don’t recognize the value of a business because it’s dependent on existing relationships with clients, who might or might not remain under new ownership.

The goal is to make sure the business owner does not rely on the sale of the business, which might or might not happen or might or might not bring the value that the owner was expecting.

“Thirty-five percent of business owners are depending upon the sale of their business to fund their retirement,” Nolte said, “and that’s just a dangerous assumption, particularly if it’s relationship-based and there are no hard assets to sell.”

On the upside, “If a client is making good money with great cash flow, there are plenty of places to put it. We’re trying to get clients to put more money into retirement plans, cash balance plans, or 401k and profit sharing plans instead of relying on a business sale,” Nolte said.

12. Consider owning the real estate you use for your business.

Owning your own office or business property comes with several advantages. Review these five:

  • Ability to build equity

  • Tax advantages

  • Predictable, fixed loan payments instead of rising rent

  • More control over the property

  • Ability to renovate to show off your brand

Additionally, owning the property allows you to “develop an income stream before and after retirement and diversify your assets,” Reardon said.

The SBA can help your business make a real estate purchase — with long-term, fixed-rate financing — through its 504 loan program. You can use this loan to buy land and buildings, for construction or to make improvements to streets and parking lots.

13. Employ others.

Extra manpower is an asset that can be expensive initially, but will allow you to scale, delegate and build equity in your business.

“Through hiring, the business builds enterprise value if you spend and invest wisely, and it can be sold later for substantial gain,” Reardon said. Another plus? “That gain is taxed at the lower capital gains rate rather than the rate for earned income,” he said.

Therefore, if you aren’t building equity in your business and are driving all the profits to the bottom line each year, you’re paying income taxes on these profits. Conversely, if you’re hiring people, you are growing your firm and investing money in your business, which will mean lower profits — and lower income taxes.

The bottom line

Small businesses account for 46 percent of the private nonfarm GDP in 2008, according to the most recent data from the SBA. Incorporate these tips into your personal and small business strategy and your contribution will be building a successful business before enjoying a long and happy retirement.