Successful entrepreneurs are intensely focused on their business. That's a big part of what makes them successful. But as your business grows, it becomes very important to expand your focus on your personal finances and take the right steps to cover your current expenses and plan properly for the future.
“In my experience, most entrepreneurs have great instincts, great determination, and business vision, but very few have a well-thought-out personal wealth management plan,” says Raleigh's RBC Wealth. said Nicholas Murphy, first vice president of management and financial advisor. , North Carolina “It's like a lawyer not having a will. Lawyers are so focused on business planning that they forget to create a personal estate plan.”
Thomas Six, a wealth strategy consultant at RBC Wealth Management in San Francisco, Calif., says entrepreneurs typically work in teams and receive advice from other professionals, but they don't necessarily have to work with teams to fit their individual needs. It is said that there is no guarantee that they will be organized.
William Freeman Jr., a business consultant at the Maryland Small Business Development Center in Baltimore, Maryland, says the team should include “qualified accountants, attorneys, tax experts, and personal financial advisors.” Stated.
When business is strong, it's time to decide on the best strategy to pay yourself and build long-term wealth for you and your family.
Legal structure affects payment plans
Many businesses start out as sole proprietorships, transition to partnerships, and sometimes to S or C corporations. How you pay yourself depends on the structure of your business, and there are legal and tax implications as well.
Sole proprietorship: As a sole proprietor, all your assets and liabilities are yours, so you pay yourself with an “owner's draw” instead of a salary, Six said.
“You won't pay Social Security or Medicare payroll taxes on the lottery, but as an independent contractor you will pay both income tax and self-employment tax on that income,” he said.
Murphy said many entrepreneurs choose the LLC structure for protection from creditors and to separate personal assets from business assets in the event of a lawsuit. Six says all business owners should be careful to keep business and personal funds separate for accounting purposes.
partnership: If you own your own business with a partner, you and your partner can decide whether you want to receive your income as a withdrawal or as a “guaranteed payment,” Six says.
If you have an LLC, payment protection is optional. Although you will pay income tax on this payment, this expense is an item that reduces your company's annual tax liability. “You're going to pay your taxes one way or the other. It's just a matter of which method is most advantageous to you based on your individual circumstances,” Six said.
S and C corporations: Once the business is incorporated, Freeman said, he can choose to receive a salary and pay himself a bonus.
Another option is to take dividends, which can be used as a strategy to manage personal taxes, since it's similar to a lottery and the return of capital to shareholders is not taxed, Six said.
It is possible to pay yourself down with a shareholder loan, but Mr Freeman warned that it must be repaid on time at a certain interest rate or it could cause tax complications.
“Wealth advisors can advise you on when and how much money to withdraw from your business, but consult a tax accountant to determine the best way to move funds out of your business for personal income and wealth building. It’s important to do that,’” Sixx said.
Retirement planning challenges for entrepreneurs
It's important to not only decide how to pay now, but also plan for the future. “You have to decide how much you want to grow your business and whether you want to keep it as a family business or even bring in other families,” Six says.
He recommends even self-employed individuals set up a retirement fund and establish a 401(k) or profit-sharing plan as they grow.
“Each plan has its pros and cons, so you should consult with your attorney and estate planner to determine the best way to establish your retirement savings,” Six says.
An entrepreneur's retirement savings often includes deciding whether to ultimately sell the business. “If your business is very successful, you need to start thinking about an exit strategy,” Freeman says. “If you are planning to sell your business, you may want to reinvest more of your profits now and pay yourself less to get paid more.”
Consult an advisor when strategizing for future sales. Mr. Murphy met with a business owner who was planning to sell his business and said he would consult with a financial advisor once the sale was completed. In retrospect, it wasn't an ideal move.
“When he came to me afterwards and talked about the next chapter in his life, he said he wanted to start a charitable foundation,” Murphy said. “If he had come to me before the business was sold, he could have used the shares in the business to fund charity work.”
Diversification is essential
Investors understand the importance of diversification, but investing in someone else's business can be difficult for entrepreneurs, Murphy said.
“Managers often want to continue investing in their business rather than withdrawing money,” Murphy says. “They'll say to me, 'I'm making a 20 percent profit from my business, so why should I invest in something that's a 6 percent profit?'” I will explain. “You would never bet the entire financial world on a single stock, but as a business owner with no other investments, that's what you're doing.”
Murphy says a common trait among highly successful people is that they always believe they will succeed. That optimism is essential for entrepreneurs, but it can be a blind spot for personal finance.
“If you're not putting money from your business into your personal balance sheet, you're not protecting yourself from the possibility of your business going out of business,” Murphy said.
While a financial advisor can't replace a business lawyer, estate planner or tax advisor, a personal wealth planner can coordinate a team to help you achieve your life goals, Murphy says.
“The one thing most business owners have in common is a lack of liquidity,” Murphy said. “Often, their only asset is their business and its assets. Here's the problem: You have to develop a clearly defined plan to build more liquid and marketable assets. If you do, you will become completely hostage to the business cycle.”
“Pay yourself first” is a mantra for establishing a smart savings pattern for everyone, and it should be the same for all business owners.
This article originally appeared on Forbes WealthVoice.
RBC Wealth Management is a division of RBC Capital Markets, LLC, a registered investment advisor and member of NYSE/FINRA/SIPC.
