Are Business Owners Planning To Fail?

There’s an old saying, “No one plans to fail, but many fail to plan.” Are you a planner? I am, and I owe that part of me to my mother, who I will proclaim to be the Queen of Lists. Growing up the kitchen was always decorated in post-it notes, scrap paper taped to countertops and important notes slapped to the refrigerator with magnets. It’s how she planned ahead. It’s how she delegated. In some ways, it’s how I learned to run my business. 

I learned that success came from segmenting to-do lists and delegating tasks effectively. What about you? Do you own a business? Have you thought about starting a business? Do you have a plan? Or are you planning to fail? 

Starting up and keeping up with a business can be deceptively simple. After all, Facebook was launched with just an innovative idea, a laptop, and a dorm room.  But from the very beginning, business owners need to be aware that even the most basic business models include considerable financial planning complexity.  Complexities, that if managed correctly, can provide unique financial benefits. Complexities that, if ignored, can lead to the dissolution of the business.  

So, whether you own a business or would one day like to have one, grab a post-it note or scrap piece of paper and jot down a note or two as we review how business ownership takes financial planning to another level. 

Tax Planning:

The legal structure chosen for the business will determine how the business profits are taxed.  As a sole proprietor or single owner of a limited liability corporation (LLC), your business income is treated the same as your personal income, making tax compliance considerably simpler.  Add partners or additional LLC members, and while again the business income flows through to the individual return, it is possible to split the taxable income (and losses) of the business in ways that can benefit multiple owners.  S-corporations and C-Corporations get even a little more complex. Which is best for you? Do you have a legal attorney and a tax attorney to help with this important decision? 

Risk Management:

It’s important to protect what’s important to you. Hence, most individuals will focus on a couple protection tools. They transfer the risk of financial loss due to health, disability, death, damage to property and litigation.  Once an individual owns a business, however, the risks multiply to include: interruption of the business due to a disaster; death or disability of a person key to the success of the business; loss of business property; and lawsuits resulting from negligence or defective products.  These risks require specialized insurance coverage over and beyond what the owner holds for himself and his family.  Don’t fail to plan in this area! 

Retirement Planning: 

Many business owners see their business AS their retirement plan –a source of capital that will fund their retirement needs.  Thinking along these lines is generally a mistake; if anything, a business owner may need more retirement planning rather than less, to prepare for the time when he or she no longer can or wishes to work, and/or a business sale doesn’t fully provide for his or her financial needs. In short, business owners need to save. The good news is that business ownership affords all sorts of tax-advantaged ways to save for retirement, and the ability to put aside amounts considerably larger than what is permissible to non-business owners.    

Investment Planning: 

Most small businesses are self-financed by their owners, which results in the business becoming the owner’s major or only investment. Often times that means there is an inadequate amount of liquid capital for emergencies and opportunities. Mature business owners shouldn’t rely too heavily on loans or leverage to meet business operations. Even when the owner has extra capital to make other investments, he or she may still prefer to put money back into the business, where he or she feels there is the most control over financial returns. Prudent planning nevertheless must be focused on diversification.  Asset classes and investments must be carefully selected for the owner’s personal portfolio to offset the concentrated risk he or she is taking with the business. 

Estate Planning: 

If a small business grows and becomes a valuable asset, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business.  What about business continuity? Estate taxes? Liquidity for heirs to pay those taxes? Most owners fail to have a succession plan; a legal agreement, funding and an operating plan.  Perhaps you should consider a reorganization of the business to create different types of ownership for family members. 

Conclusion:

Here is the key take away: When it comes to financial planning for the small business owner, the “do-it-yourself” drive that helped start the business will not serve an owner well when it comes to managing the many financial issues created by that business.  This is where professional expertise often becomes necessary.  

Exercise your privileges as “the boss” and delegate these issues to qualified tax and financial planning professionals.  Their advice can make all the difference in improving your chances of business success. 

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.  Tracking # T005776