Tax planning stays on the back burner for most women until the last few months of the year. You might meet briefly with your CPA, estimate where the year will land, and look for any last-minute opportunities to reduce your upcoming tax bill. But by then, most decisions affecting your tax bill have already been made.
But when you own a business, tax planning should be happening all year long. Your future tax obligations are reflected in how your company is structured, how and when you pay yourself, how much you contribute toward retirement, and where you choose to keep or deploy excess cash.
All are important decisions, and all affect both the business and the personal wealth you’re building outside of it.
The Importance of Year-Long Tax Planning
Most business owners aren’t blessed with perfectly predictable income patterns. Your financial picture changes throughout the year, depending on both internal decisions (like hiring or purchasing equipment) and things completely out of your control (say an economic downturn or loss of a major client).
The unpredictability of your income requires tax planning to be an ongoing activity, rather than an annual exercise.
For example, the timing of certain income and deductible expenses affects when taxes are recognized. A significant purchase faces different tax implications depending on when and how it’s made. Hiring decisions, employee benefits, and retirement plan contributions also influence both business cash flow and taxes.
No one wants to pay more in taxes than they have to, and business owners have more opportunities than W-2 employees to leverage tax incentives. However, paying the absolute minimum in taxes every year might not always be the objective. Sometimes, paying tax today will support a larger financial objective long-term. You won’t know what the best moves are until you incorporate tax planning into the business and personal financial decisions that take place all throughout the year.
Your Business Structure Is Worth Optimizing
Your entity choice affects both liability considerations and taxation.
What some business owners don’t realize is that the structure that worked when you originally launched the company deserves another look as the business evolves. An LLC offers liability protection, for example, but lacks the real tax advantages of a corporate structure.
Maybe your revenue has grown substantially, year after year, or you’ve added employees and partners. What started as a relatively simple operation has become a valuable asset. You might even plan on transferring or selling it in the coming years.
The natural changes your business experiences over time may alter the financial trade-offs involved in your current structure. Rather than viewing entity selection as a one-time startup decision, you’ll likely need to revisit whether the structure still fits both where the company is today and where you expect it to go.
How You Pay Yourself Shapes Your Personal Wealth
When you own a profitable business generating significant income, much of your own net worth is tied to a single asset: the company itself. How money moves from the business to you personally deserves careful consideration.
Your business structure determines the tax implications of your compensation and owner distributions. At the same time, the amount you take from the company affects your personal cash flow and the ability to save and invest elsewhere.
Retirement plans can be particularly important for business owners. Depending on the business and plan design, options such as a solo 401(k), SEP IRA, SIMPLE IRA, or even a cash balance plan allow you to build retirement assets while potentially creating tax advantages for the business or yourself. Creating and contributing to a retirement plan often falls to the bottom of the list of priorities for business owners. However, building assets separate from the business is critical, especially assets that can support your eventual financial independence.
Regularly directing some of the wealth the business generates toward retirement accounts, investments, cash reserves, and other personal assets can gradually create a financial life that is less dependent on one business outcome.
Don’t Forget, Decisions Today Impact Your Long-Term Goals
Even if you feel years away from selling or transferring ownership, decisions made now influence how an eventual transition plays out. Future successors will consider the ownership structure, as well as the way value has accumulated within the company.
A business owner approaching a sale with substantial personal assets, for example, maintains greater flexibility around when to sell, how much income she needs from the transaction, and what comes next. Someone whose wealth remains concentrated in the business retains less negotiating power and faces more pressure to sell, possibly under less-than-favorable circumstances.
Remember, you are building two things at the same time as a business. You’re growing a valuable company and securing your own financial future.
Connecting decisions across the business and your personal wealth is integral. The wealth created by your business should support the life you’re planning for beyond it.
The Hatlestad Group is an independent wealth management firm based in Edina, Minnesota, primarily serving successful head-of-household women, late-career executives, and pre-retirees. With a tailored approach to fee-only comprehensive wealth management, they empower clients to live out their next chapter with vision, wisdom, and resources, creating a purposeful and meaningful future. They can be reached by phone at (763) 259-3637, via email at info@thehatlestadgroup.com, or by visiting their website at thehatlestadgroup.com.
The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.