Financial Planning for Small Business Owners


It’s Your Business—and Your Life
If you’re like most small business owners, your personal life and business life are practically inseparable. That’s why it’s important for your personal financial planning to take into account the unique considerations—and opportunities—of owning and operating a small business.

The risks of going out on your own

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Being the boss can be exhilarating. But there are also significant risks to going out on your own. Unfortunately, the failure rate of small businesses is high. The keys to success lie in proper budgeting, determining the right product for your market or audience, marketing that product, and then selling it at the right volume.

What small business owners sometimes forget is that they need to adapt their own individual financial plans for the new realities and risks of being a business owner. One point should be clear when it comes to financial planning for the small business owner: the do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business. This is where professional expertise often becomes necessary.

Holistic financial planning for an individual or couple generally involves tax planning, risk management, investment planning, retirement planning, and gift and estate planning. For each of these areas, let’s consider how business ownership takes this planning to another level.

  • Tax Planning: Tax planning is a year-round approach that is done in the context of your overall financial picture. The goal is to make sure that a given tax saving strategy won’t undermine your other important financial goals. Take the decision of choosing a business structure, for example. Sole proprietorships, partnerships, S or C Corporations, and LLCs or LLPs have different income tax requirements and tax calculations. New laws might prompt you to consider changing from one business structure to another to reduce your tax bite. While this could be a wise move, be sure to consider nontax issues as well, such as how a new business structure will affect your ability to shield your personal assets from business creditors, take deductions for fringe benefits, and pass the business to your heirs.
  • Risk Management: Most individuals need to plan for the financial risk of early death, disability, illness and infirmity, and liability or loss related to property ownership. 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. This last risk can be addressed in part by the legal structure of the business, but the others require specialized insurance coverage over and beyond what the owner holds for himself and his family. If the business has employees, worker’s compensation coverage becomes necessary as well.
  • Retirement Planning: It’s not uncommon for business owners to assume they will never retire. After all, they’re presumably doing what they love, so why not continue indefinitely? Alternatively, they may see the business as the only retirement plan necessary—as 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 no longer can or wishes to work, and/or the business cannot fully provide for his financial needs. 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. Even when the owner has extra capital to make other investments, he may still prefer to put his money back into his business, where he feels he has the most control over his 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 is taking with the business.
  • Cashflow Planning: The challenge for many business owners is unlocking cash flow; something that can be tricky if the majority of your net worth is tied up in your business. This is where data-driven, quantitative sales forecasting comes in. Your business’s past performance and revenue is usually a solid place to start. You can also look to industry trends to help predict future sales. If you’ve been in business for several years, you probably have a feel for which months are lean and which months are booming. Use this knowledge to your advantage and plan your budget accordingly. Just like when managing your personal finances, setting aside an emergency fund of liquid cash reserves can help see you through a tough spot. The optimal amount of cash to hold really depends on how long the business could sustain itself in the event of a cash flow shortage. Speculate how long your business could stay afloat while cash flow negative, then map out a worst-case scenario for each of those months and add them up. The total should give you a good idea of how much cash to hold.
  • Estate Planning: Estate planning—and more specifically, business succession planning—is essential for anyone who owns a small business because typically the business is the largest asset in the owner’s estate. This is not just a tax issue. Without business succession planning, it’s unlikely that your business will survive to the next generation or sell for its true value. This assumes, of course, that succession or sale is a goal. 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. More sophisticated financial planning techniques will be necessary to ensure business continuity after death, reduce any estate taxes assessed for the business, and to provide liquidity to heirs to pay those taxes. A reorganization of the business might be advisable to create different types of ownership for family members, and to make full use of IRS-sanctioned discounts in valuing the business for purposes of gift and estate taxes. Insurance trusts and charitable trusts can also play an important role in the efficient transfer of a small business.


  • Exit Planning: Another thing on the radar is what to do if you’re thinking about exiting the business—more specifically, planning for such a large liquidity event. Do you have a plan for how you’ll leave during a period of growth? Is your management team able to function smoothly without you, or do you need to invest in hiring new talent? Attracting worthy buyers is the other element at play. Our simple Business Valuation Tool is a great jumping-off point. Creating customized financial plans for small business owners is part of what we do.


At Lionshare Partners, we take the intimidation factor out of the equation, replacing it with sound financial advice and actionable steps to help entrepreneurs feel confident every step of the way. We design in-depth, personalized strategizes that optimize performance and set the stage for long-term growth for your small business.

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