1. Using a business bank account for personal expenses.
Fueled by the tax savings received from business expenses, some owners chase the tax savings too far by making excessive personal purchases. Mixing personal and business expenses can create legal and accounting problems. It leads to more personal legal liability, difficulty in monitoring your business finances, and scrutiny from the IRS.
2. Paying high wages.
Wages are typically set when the business is doing well. Once a pullback in the economy happens, there are ways to lower wages without changing net pay. Employer contributions to a retirement plan or shareholder distributions can lower the total cost to the business while keeping their employee’s net income the same.
3. Leveraging debt incorrectly and not taking advantage of tax opportunities.
Small business owners don’t utilize debt for several reasons. Some have an emotional aversion to debt; others don’t know current interest rates. Using debt instead of the business’s cash can allow those funds to fuel the business’s growth. Ask your financial advisor to explore this strategy. Debt may allow your professional team to find cost-saving financial planning opportunities to raise your net profit.
4. Not surrounding themselves with a team of experts (bookkeeper, CPA, attorney, financial advisor)
Many business owners try to do it themselves or find the lowest-cost solution. At their core, business owners are amazing DIY problem solvers. This means that they spend too much time working on business components that they could outsource. Knowledgeable professionals will cost you cash upfront but will save you time and money in the long run. They will also ensure that tasks are done right the first time. Developing a team can be difficult, ask for recommendations from your financial advisor.
5. Structuring their business incorrectly.
The legal structure of your business has huge tax, legal and management considerations. Many business owners unknowingly choose their business structure based on convenience, simplicity, or cost. Your team of experts should guide you on the best structure to maximize its tax and strategic benefits.
6. Not having a succession plan.
Thinking about the later years of life, it’s easy to neglect succession planning because it can be a daunting exercise. The phrase “there are only two certainties in life- death and taxes,” is true. Sooner or later, you will no longer be a business owner. If you want control over how the transition looks, you need to develop a strategy. Having a business continuity and exit plan will help your family transition business ownership in the event of your death or serious health issue. Your future self and family members will thank you the earlier you get started. Look at our business succession flowchart to see if your business is ready for succession.
7. Having no retirement plan.
Business owners are busy, and retirement plans can be complicated. Many times, retirement plans are a powerful tool that is often overlooked. A retirement plan offers benefits for employees, owners, and the business itself. Exit and estate planning can play into a business’s retirement planas well. If you are curious about retirement plans, reach outto one of our advisors to see if it makes sense in your business.
8. Having too much or not enough insurance.
Nobody wants to pay too much for insurance because running a business is expensive enough. But not having enough insurance can be a disaster. Insurance is a tool used to reduce risk, so having the right amount of insurance is important. There is a multitude of insurance products out there so figuring out what one needs can be difficult. A financial advisor can guide you to the right amount from an unbiased perspective and show how it fits into your overall financial strategy.
9. Not funding a buy/sell agreement.
For business partners, what happens if one partner dies? Buy/sell agreements will solve this dilemma. They are a key tool for estate, succession, and financial planning. However, if you don’t fund them with life insurance, they are useless. If you die, what happens if your business partner doesn’t have enough money to pay your family for your share of the business? Typically, the business doesn’t have enough cash on hand to buyout out the family’s entire share. Life insurance on each business partner ensures cash is available to payout family members in the event of a partner's death.
10. Prioritizing their business over themselves, community, and family.
Owning a business takes a huge amount of time and can cause personal priorities to be put on the back burner. Just like your investments, it’s important to diversify your time with what you value the most. If you have a successful business and don’t have enough time for other priorities, you need to do strategic planning. Making yourself less essential to daily operations is key.
11. Failing to file the proper legal structure, licenses, business registration, and taxes for their state.
One of the common mistakes business owners make is filing the proper legal structure, licenses, business registration, and taxes in their state. One helpful tool for Washington business owners is the Business.Wa.govsite. This will guide you through all the complexities and make sure you’re filing your annual report and paying B&O taxes.
How financial advisors help small business owners
As a business owner, having a team is important because you can’t do everything. A common theme among successful people is to surround themselves with experts. Our financial advisors synergize business and personal financial planningto save you time, so you can do more of what truly matters. Do what you’re best at and find the best for the rest.
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About the Author
Noah Schwab CFP® is a financial planner in Spokane, Washington who specializes in helping small business owners with retirement plans and personal finances.
