According to U.S. Census Bureau statistics, an average of 4.4 million businesses are started in the United States each year. Unfortunately, 50% die by year five (Fundera). Planning and preparation can make the difference in whether your business survives.
This quarter’s education topic has focused on financial planning considerations for business owners. In this blog post, we dive a little deeper and discuss additional items relevant to business ownership. Some topics benefit from professional guidance, and we recommend getting the opinion of your attorney, accountant, or financial planner.
Do you need business insurance?
We discussed business insurance in a previous blog. And here we reiterate the importance of insurance coverage to address business-related risks. To protect a business in the event of an owner’s or executive’s death, business owners often add key person insurance or a buy-sell agreement.
Key person insurance is a life insurance policy that a business takes out on the life of the owner or other individual determined to be critical to the business. The company owns the policy on the key person’s life, pays premiums, and is the beneficiary of the death benefit. This helps ensure financial stability for the business.
Buy-sell agreements are legally binding contracts that stipulate how a partner’s share of the business may be reassigned. The agreements often use life insurance policies on the life of owners to help ensure continuity of the business upon the death of an owner.
Disability events and facility damage can also devastate a company and should be considered as part of business insurance planning. Overhead expense insurance and business interruption insurance often cover these scenarios but have different purposes. Business overhead is coverage on a key person in the business, is paid to the business, and is deductible by the company. The purpose is to provide cash flow if a key person experiences illness or injury that takes them away from the business. Business interruption coverage offers protection if the business facility itself is damaged.
Will your business need a license or permit to operate?
Industry regulations exist to ensure that a business is safe for the public, and a license shows that a business is compliant with government requirements. The type of license depends on whether your business requires a federal, state, or local license. And the type of your business determines which level of license is required. Not complying with licensing requirements can result in penalties and fines or even the revocation of the license. The Small Business Administration is a good resource to familiarize yourself with types of licenses and permits. And another good source is your state’s Secretary of State office or Department of Revenue.
Will the business have to collect and pay sales tax?
If your business sells physical products or even certain services, you are required to collect and pay sales tax. You must register for the sales tax permit, collect the tax at the point of sale, and then send collections to state government. There is a separate sales tax form, and each state has its own requirements and due dates. Your financial planning or accounting professional is able to guide you in this.
Should you accelerate depreciation or use traditional depreciation on any large expenses you are incurring as a business owner?
Consider the extent to which each method affects your personal tax rate (larger deduction up front vs. spread out). And determine which option might better reduce your taxes paid over time. If you use an accelerated version of depreciation, be mindful of any risks or limitations that may apply (e.g., potential for recapture, flexibility limits, dollar limits, NOL carry forward limits, planned sunsets/phase-outs, etc.). We recommend you seek the guidance of a tax professional on this particular issue due to its complexity.
Are your quarterly estimated tax payments appropriate?
Making tax payments each quarter can help avoid large payments due or payment penalties at tax time. You should consider how your business income and expenses (e.g., wages, retirement plan contributions, depreciation, general expenses, etc.) may impact your overall tax liability, and be sure to factor these in when making your quarterly estimated tax payments. A qualified tax professional can help determine what is appropriate.
Do you need to review your gifting and/or estate plan in light of being a business owner?
It’s important to ensure your business is included in your estate plan and how it affects asset distribution. There are many considerations in determining the best way to transfer a business that an attorney can walk through with you. Without an estate plan or a business succession plan, state law would dictate what happens to your business. Consider the impact your business may have on your existing plans for transferring assets to the next generation. Then see a qualified estate planning attorney to help you in the process.
Are you concerned about your ability to qualify for financing as a business owner?
Think about ways you might improve your financing options (e.g., larger down payment, improving debt-to-income ratio, pledging assets as collateral, coordinating with your spouse, etc.), especially if your business is young or you have inconsistent income. Be mindful that many lenders require a history of earning to qualify.
Are you considering hiring an additional employee?
Weigh the pros and cons of whether hiring an employee will help you reach your business goals (e.g., increased productivity/profitability) as well as personal goals (e.g., work-life balance). Furthermore, consider other specific factors (like hiring a family member, W-2 vs. 1099, etc.) that may better complement your financial planning goals.
Planning and preparation can increase the likelihood of your business surviving. And you can ease the burden of business ownership by working with a team of professionals. With their expertise, you can ensure that you’re considering all relevant information. Contact us to see how we might help.