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Top 5 Financial Challenges Facing Business Owners


All too often business owners painfully discover that successfully building their business does not always directly translate into successfully building their personal wealth. If you consider the multitude of day-to-day business demands, it is easy to lose sight of the ultimate purpose of your business - to enhance your personal wealth. To successfully transform your business into a personal wealth creating machine requires a purposeful and systematic effort. Additionally, at some point you must also worry about your business if something unexpected should happen to you.

These are the five critical challenges we have most often encountered working with business owners over the past 20 years. The good news is that these challenges can represent opportunities if properly addressed in a timely basis.

1. What strategies can I use to help keep my taxes as low as the law allows?

With the goal of helping you and your business keep more of what is earned, there is a wide range of tax planning opportunities that come with business ownership:

  • Business Entity: Effective tax management starts with your company’s chosen business structure. In certain instances, for example, a Sub Chapter S Corporation could allow operating losses to pass to you, the owner, thereby providing personal tax benefits. In other situations, a regular “C” corporation may protect you from passing through income that could otherwise have an adverse effect on your personal taxes. A limited liability company (LLC) may offer some advantages of each. It is important to periodically review your structure in light of current and anticipated business performance over the foreseeable future.
  • Tax Advantaged Benefits: In addition, there are a wide range of options that may provide benefits to you as well as selected employees on a tax advantaged basis. These can include health and welfare trusts, individual pension plans, retirement compensation arrangements, holding companies, charitable donations and estate freezes. How beneficial these may be requires careful consideration of your individual situation.
  • Tax Deductible Payments to Owners: Often it can be advantageous for you to purchase an asset personally, then rent or lease it to your business. This can involve equipment or real estate, and can not only allow your business to deduct the payment from its tax return, but also allow you to shelter a portion of taxation from that payment with depreciation, interest and other expenses, thereby enhancing your benefit.

Effectively managing your tax situation requires an ongoing effort. Your strategies need to adjust as your goals and financial situation changes.

2. How can I protect my business and personal assets against liability?

Especially in this litigious age, protecting business and personal assets against a liability claim is critical to financial success. As a starting point, the appropriate business structure lays the foundation for limited liability protection. While this may not protect your business itself, it could help protect your personal assets. Beyond that, it is important to:

  • Periodically review the basic corporate documents (articles of incorporation, bylaws, meeting minutes, state filings, etc.) to assure they are in good order and properly maintained.
  • Make sure employees are not given the appearance of greater authority than you intend they have. Their job titles should be consistent with their function, with appropriate checks and balances that a “prudent business person” would take to assure employees are acting within the scope of their authority.
  • Review capitalization levels to make sure that excess cash or unrelated assets are not being left in the firm unnecessarily.
  • Consider general and professional liability insurance that could protect against allegations of negligent activities or failure to use reasonable care.

3. How can I protect my business against the death, disability or departure of one or more key people, and how can I do that before events take my choices away?

Because small businesses are so dependent on one or a few key employees, their inability to perform can result in tremendous lost revenue. Several planning tools are available, such as:

  • Key Person Life and Disability Insurance: Provides the business with cash compensation to help replace such a costly loss.
  • Buy-Sell Agreements: Can provide contracts to compensate families and provide for smooth ownership transition in the event of death.
  • Split Dollar Life Insurance: Adds tax advantaged savings features to the aforementioned benefits the business might receive should one of its key personnel die unexpectedly.

Owners typically want to make sure their family is duly compensated for the business they’ve built and that the right people are at the helm in their absence. All told, it is important to have a comprehensive protection plan that can provide continuity and protect your business value should you or a key person be lost or become disabled.

4. How can I convert my business into planned retirement income?

For many business owners, this becomes the ultimate question. With all businesses, especially those that are primarily service oriented, it is important to transition from one that is “Lifestyle Based” to one that can be “Equity Based.” Lifestyle, as the name implies, is designed to support your living standard according to your schedule, income and tax benefit needs. As such, the value is based on you and typically diminishes or vanishes when you retire or pass away.

By contrast, an Equity Based organization is designed to run with the intention of providing a value that can be accessed by you or your family at some future time. Keys to developing an Equity Based entity include:

  • Staff: You must surround yourself by people capable of replicating the product or service your business provides, thereby removing you from the day-to-day business operations. Critical in this is your staff’s capability to handle routine matters, especially those that involve customer contact. Your involvement of course remains, but is elevated to a significantly higher level like new business development and strategic planning.
  • Procedures: Key to the businesses equity value is its ability to deliver a consistently high quality product or service independent of your involvement. A “replicable” process can only be based on developing clear procedures and guidelines that motivated staff can follow without your constant oversight and direction. Michael Gerber’s “E-Myth Revisited” provides an excellent foundation for proceduralizing that replicable process.
  • Retention: It is essential to have one to three key employees who can act as you would, take pride in the business’ success, and have effective incentives to thrive personally along with that success. Bonuses based on performance and results, or even potential incremental ownership over time may prove helpful in retaining good employees.

Succession can involve ownership transference to family members, co-owners, current employees or an outside third party. The keys are that your business is capable of operating separately from you, and that the transference is done in the most tax advantaged manner possible. Depending on the circumstances, this can result in a lump sum, a payment over time, an on-going interest in your business or some combination of these.

5. Which Qualified Retirement Plan is best for my situation?

Several factors need to be considered, including:

  • Consistency of Business Revenues and Income: Generally, greater tax benefits are available at the cost of higher committed plan contribution levels. The downside, of course, is that in lean years it could be difficult to maintain those higher contributions. It is important to carefully weigh these, and often we advise to err on the side of greater flexibility and lower contribution levels.
  • Owner or Employee Emphasis: The Employee Retirement Income Security Act (ERISA) is the major body of regulations that specifies minimum participation requirements for rank and file employees. Within these rules is some flexibility that can allow owners to receive a relatively greater proportion of dollars contributed. This is especially true if the firm is willing to make prescribed minimum contributions under “Safe Harbor” provisions, and/or if the key employees have a significantly higher average age under “Age Weighted” arrangements.
  • Retention: Ensuring that your dedicated staff is sufficiently compensated so as to not be tempted to look elsewhere for employment is important. It may also be a priority to provide them with an incentive to begin saving for their futures. This is especially important because many workers are not saving enough to be able to live comfortably after retirement and as their employer you might be worried about their well-being.

Every business owner weighs the relative importance of these issues differently. Generally, each plan has trade-offs between the amount of annual tax-deductible contributions allowed, flexibility of varying that contribution in good and lean years, and a desire to reward employees versus encouraging them to save for themselves. When done properly, the right retirement plan can provide you with effective tax benefits now, a stream of reliable income well you’re your retirement, and a motivational-retention tool for important employees.

Every owner will one day leave their business. The question is, will it be on your own terms or dictated based on health or financial circumstances? When it is properly planned, it can be a positive, life changing, wealth creation event that brings financial independence to you and/or your family, and has the added benefit of leaving your business as a healthy, viable entity that can flourish long after you leave.

As CERTIFIED FINANCIAL PLANNERSTM, we help business owners develop a clear picture of their business’s value and then integrate that information with their personal financial situation to give a comprehensive view needed to plan for their successful future.

We look forward to helping guide you on your own unique journey to financial confidence. Call us today at 614-225-9400 to get started.  

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