Protecting the business
A successful business is an important asset that can provide for you and your family. It’s important to safeguard its operations.
5. Business succession planning.
It’s not unheard of for a business owner’s heirs to be uninterested in running the company — or simply unsuited for it. Business owning families may consider a buy-sell arrangement specifying how co-owners or co-shareholders can purchase your shares when you retire or die. Arrangements can come in many forms and may contemplate a cross-purchase, redemptions and/or can be supported by life insurance.
6. Opt for key person insurance.
Another reason for life insurance is to reduce the possibility that the business fails following the death of a person key to company operations.
7. Weigh entity classification.
Choosing an appropriate entity structure can make the business more valuable and flexible.
- When forming a business, consider how third-party investors, employees or a founder’s trust can be owners, even when such things may not occur for three to five years into the future. It will be less costly to do it up front versus a complicated reorganization of a going concern.
- Consider owning business real estate outside of the operating business so that the business can be sold while the real estate is retained and leased to the buyer for an income stream.
Growing personal wealth and legacy
As a financial goal, growing your wealth is likely the most important. Wealth growth involves gaining returns on your investments and increasing your wealth through capital appreciation.
8. Take advantage of qualified plans.
Roth IRAs and traditional IRAs allow you to grow wealth tax free and tax deferred, respectively.
- While many startup founders may not have the earnings to invest in these plans, be careful about solicitations to put ownership of your business in a qualified plan.
- Begin diversification of wealth outside of the business in non-correlated assets.
9. Conduct estate planning.
- When the business is small, shift equity into long-term trusts so wealth can accumulate outside of the estate and gift tax net.
- Use annual exclusion gifting to move wealth down generations.
- Saving for the next generation’s college education can grow free from federal income tax in a 529 plan, which also allows tax-free withdrawals for qualified expenses.
10. Plan for philanthropic giving.
Gifting of business interests to charity is a common tactic before a liquidity event, reducing or even eliminating capital gains tax. However, the donations need to be completed before a deal with a prospective buyer is signed.
- The philanthropic options will be directly impacted by the choice of business entity.