Financial planning for business owners: 5 things to consider
Head of Small Business and Business Owner strategy, J.P. Morgan Wealth Management
- Business owners often have much of their wealth tied to their business. Having a holistic financial plan in place that addresses your personal needs and the needs of your business is important.
- Start retirement planning early, especially if you own a small business – both for you as an individual and for your employees.
- Succession planning and life insurance are core parts of a well-rounded financial plan for business owners.
- Planning across horizons with a focus on diversification while working with a financial advisor can help ensure long-term efficiency and continuity.
Building a financial plan when your business is your plan
Running a business often means you are the last person you take care of. Most business owners spend their days focused on clients, employees and whatever it takes to keep things moving forward. It’s not uncommon to have most of your wealth tied up in the business, with little time left to step back and think about the bigger financial picture.
But that bigger picture matters. Planning ahead not only protects what you’ve built, it also supports your personal financial goals. That’s why it’s often recommended to build a separate financial plan for your personal assets that treats the business and your individual goals as distinct. Keeping them separate can help clarify what you need for your own future, regardless of how the business performs.
If you’re not sure where to start, here are five areas that often deserve more attention than they get.
Small business retirement planning
Retirement planning can be easy to put off, especially when it feels like every dollar is going back into the business. But waiting too long can mean missing out on years of tax advantages and compound growth.
There are several retirement strategies you can consider that will address your needs as a business owner and the needs of your employees. As a self-employed professional and business owner, you have many options to choose from, including:
- Defined contribution (DC) plans: DC plans include profit-sharing, money purchase and 401(k) plans, allowing contributions from the employer, employee or both. The retirement benefit depends on total contributions, investment gains or losses, and fees.
- Defined benefit (DB) plans: DB plans, such as traditional pension and cash balance plans, provide guaranteed retirement income based on a formula, resulting in a specific monthly benefit for employees upon retirement.
- Small business IRAs: Small business IRAs, including a Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA, offer IRA-based solutions tailored for small business employers, including self-employed individuals and partnerships, addressing your unique needs.
Strategic planning built around your personal and business owner needs
You'll receive a personalized plan tailored to both your personal needs and your needs as a business owner. Partner with a team that understands your objectives and is dedicated to building a plan that matches your goals.
Your choice often comes down to how much you want to contribute, whether you have employees and how much administrative work you're willing to take on. For example, SEP IRAs and SIMPLE IRAs tend to be more straightforward to open and maintain, but they are focused on the individual business owner’s needs, while traditional 401(k)s may offer more flexibility for businesses expecting growth.
Offering a retirement plan is not only a personal decision. It can also be a way to attract and retain talent. In fact, 84% of 401(k) plan sponsors said their plan has been effective in retaining quality employees. For small businesses competing for talent, giving employees a way to invest in their own futures can help create loyalty and reduce turnover.
Business owners who plan early have more options for building a retirement strategy that doesn't rely entirely on a future business sale. With so much uncertainty in the economy, business owners must think about building resilient savings to navigate policy changes.
Succession planning: Ensuring business continuity
Succession planning answers one question: What happens to your business if you are no longer involved? Every business will inevitably go through a transition of control and ownership. Whether you hope to keep the company in the family, hand it off to a trusted partner or sell it outright, a transition plan takes time. It typically includes:
- Working with an accountant or business valuation professional to determine the present value of the business
- Building a coordinated team of professionals to prepare the business for a sale
- Developing your own personal financial and estate plans
- De-risking the business through proper planning
- Reviewing the available transition options and determining the best way to proceed that aligns to your goals. Will this be an inside transition (e.g., intergenerational transfer, management buyout, etc.) or an outside transition (e.g., sale to a third party, public offering, etc.)?
Without a plan, transitions can be messy and ultimately fail, especially if they are unexpected. Many owners delay this process because it feels far off, or they’re unsure where to begin.
Despite its importance, formal planning is still rare. Only 35% of all businesses have a formal succession-planning process in place, and among family-owned businesses in North America, more than 61% lack any written plan at all. That gap often leads to confusion, delays or reduced value during a transfer of ownership.
Strong continuity planning also helps maintain business value if you’re considering a future sale. This guide offers a practical starting point, and this related piece walks through an ownership transition exercise.
Tax planning for business owners: Optimizing financial efficiency
Taxes can be one of the biggest expenses a business owner faces, yet many leave money on the table by not planning ahead.
Some common tax strategies include:
- Carefully considering and choosing the right entity type to try to optimize tax efficiencies. For example, a “pass-through” entity such as an LLC, partnership or S-corporation will not be subject to corporate level taxation. However, a C-corporation can potentially allow a founder to enjoy capital gains tax reduction on a future sale through “qualified small business stock.”
- Timing large expenses or purchases to match expenses against income and potentially lower your applicable tax bracket for the year
- Using contributions to retirement plans to reduce your taxable income
- Tracking all deductible expenses in real time to avoid surprises and to retain documentation necessary to substantiate your tax deductions
- Calculating and paying your estimated taxes in a timely manner to avoid penalties or interest
Entity selection is one of the most impactful long-term tax decisions a business owner can make. Alongside that, keeping your records organized throughout the year, not just at filing time, may help you identify deductible costs, manage income timing and potentially reduce your total liability.
Tax considerations are also key to evaluating when and how to pay yourself from the business. Being mindful of these considerations may help connect the dots between your company’s income and your personal goals.
Insurance for business owners: Protecting yourself and your business
Insurance probably isn’t the first thing on your mind when running a business, but the right coverage can keep everything from falling apart when something unexpected happens. A strong insurance plan protects more than buildings or equipment. It helps you keep operations running and limits how much personal risk you take on if something goes wrong.
Coverage types to consider include:
- Key person insurance steps in when someone crucial to the business passes away. If you're relying on one person to drive revenue, lead operations or maintain client relationships, their absence could hit hard. This type of policy can help bridge the gap by covering lost income or the cost of hiring and training someone new.
- Buy-sell agreement insurance helps avoid confusion and conflict if one business partner dies. The idea is simple: the insurance pays out to the surviving owner, who can then buy out the deceased partner’s share from their family. That way, the business keeps running and ownership stays clean.
- Wealth transfer insurance comes into play when you’re thinking about what happens to the business after you're gone. It can help cover estate taxes or give your heirs the liquidity they need to either run the business or sell it on their own terms, not under pressure.
- Business loan protection insurance can make sure your debts don’t become someone else’s problem. Many lenders require it anyway, but even when they don’t, having a term policy in place can help pay off loans if something happens to you.
Beyond life insurance, there are other types of protection that you should explore as a business owner include general liability, property and workers' comp. As your business grows, so does the complexity of your insurance needs. A company with several employees and a physical location faces different risks than a solo consultant. It’s also common to carry a mix of policies that protect the business, its revenue and your personal exposure. Consider working with a financial advisor and/or insurance professional to see what coverage makes most sense for your situation.
Planning across horizons with a focus on diversification
Research suggests that many business owners have more than 80% of their cash and assets in their business, which poses concentration risks. Business owners should consider diversifying their wealth beyond the business, including in investible assets like equities and bonds. While diversification does not guarantee a protection from loss, it does increase the likelihood that you’ll have remaining assets should something go wrong with your business. Additionally, it allows you to access cash when needed without taking away from the business.
The bottom line
Business owners wear a lot of hats, and financial planning is often the one that gets pushed to the bottom of the list. But having a plan for retirement, succession, insurance, taxes and long-term diversification can help protect both the business and the person behind it.
Your financial goals and your business goals are connected. Getting them to work together is where planning starts to pay off. Reach out to a J.P. Morgan advisor for help defining a reliable plan for your personal and professional goals.
Frequently asked questions about financial planning for business owners
It depends on the size and structure of your company. Solo 401(k)s, SEP IRAs, SIMPLE IRAs and traditional 401(k)s all offer different features based on your company structure, income and growth plans.
Ideally, at least several years. It takes time to choose and prepare a successor or to position the business for a sale.
Proactive planning can reduce your tax bill, avoid filing surprises and help align your business structure with long-term financial efficiency.
Common types include key person insurance, buy-sell agreement insurance, wealth transfer insurance and business loan protection insurance. Other types of protection include general liability, property and workers' comp.
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Head of Small Business and Business Owner strategy, J.P. Morgan Wealth Management
