Financial Planning Considerations for the Small Business Owner

Small business owners typically have incredible drive and self-reliance as they start their business and as they grow over time.  Aside from operational, human resource, and financing issues faced by the owner, there are also a number of interrelated issues between the business and the owner’s personal financial planning that arise. These interrelated issues can vary but often revolve around income tax planning, risk management, retirement planning, investment planning and estate planning.

Income Tax Planning

The incorporation type of a company will dictate its income tax rates. For example, an entity operating as a C corporation is subject to a 21 percent flat federal tax rate.

However, most small businesses are operating as a sole proprietorship, partnership, limited liability company (LLC), or corporation taxed as an S corporation. This means the taxable income of the company will flow through to the owner’s tax return and be taxed at the owner’s federal tax rate, which can be as high as 37 percent.

There is a beneficial but complex provision in federal tax law which permits up to a 20 percent deduction in arriving at the income passed through to the owner; however, not all organizations and business owners will qualify for this deduction. Because an owner may have other items of income, deduction, or loss flowing into their tax returns from non-business sources, planning coordinated between the income from the entity and the owner’s overall tax situation can be quite valuable. Accordingly, at least one planning meeting before the business’s year end between owners and their tax professionals should be a standard operating procedure with the goal to minimize the cash outflow for income taxes on an annual basis.

Risk Management

It’s common for most individuals to insure risk relating to health care, disability, death, and home and personal property.  The risks a small business owner must consider include many more.

The choice of entity a business operates within can be the first line of defense against some risks that could jeopardize the assets of the owner.  Accordingly, many companies are operated within a corporation or LLC for this reason.

Other risks, however, may require specialized insurance coverage.  These include loss from business interruption, loss from the death of a key employee, loss related to company property, and loss from an employee being injured at work.  An insurance specialist is critical to assist the owner with evaluating these and other risks and insuring them in an affordable manner.

Retirement Planning 

Often small business owners view their firm as their retirement plan and consequently put much of their savings back into the organization as it grows. Certainly, carrying larger and larger accounts receivables and inventory does require a lot of cash flow.

However, to help diversify an owner’s retirement planning, steps should be taken to build liquidity outside of the company. For example, the establishment of a qualified retirement plan can provide the owner with the ability to contribute far more dollars for his or her benefit than can be done by a non-business owner. Many owners believe they will never retire but illness or company failure may present a sudden change in plans. Accordingly, retirement planning with the help of a CERTIFIED FINANCIAL PLANNER™ professional is critical for both small business owners and their families.

Investment Planning

Most owners have extreme concentration risk in their investment portfolios because the value of their business represents a disproportionately high percentage of their portfolio. Owners should work towards diversifying their portfolio with the help of a CERTIFIED FINANCIAL PLANNER™ professional, who can not only assist with the construction of a diversified portfolio taking into consideration the risk tolerance and other assets of the small business owner, but also can assist the owner with evaluating options for the periodic tax efficient funding of a diversified portfolio.

Estate Planning

Often the estate planning for the small business owner is not primarily driven by the desire to save estate taxes given the very generous estate tax exemption currently in the law ($11.58 million per person in 2020). This may change under the Biden Administration to a lower amount.

In many cases, however, a larger issue revolves around the continuity of the company if the owner should become disabled or die. Having a documented succession plan can be extremely valuable to help preserve the value of the entity. Life and/or disability insurance may also play a role in this planning as a critical need upon an owner’s death or disability is to provide income and a source of liquidity to the owner or the owner’s family without the need for a “forced” sale of the company. Also, small business owners should be focused on having current estate planning documents, including a will and power of attorney, which expresses their current wishes as to how their business ownership and control is transferred in a death or disability situation. An attorney specializing in estate tax law can be of great help in this regard.


As can be seen, owning a small business has the potential to add significant complications to the overall financial planning of the owner but also presents opportunities. These complications and opportunities are best dealt with by the owner enlisting the help of an advisory team of professionals competent in the aforementioned areas.  Meeting with this advisory team routinely can help the owner explore the opportunities and solutions to the various planning challenges of owning a small business.

If you’d like to talk through how you can best protect the legacy of your business and your personal finances, we are always available to start a conversation! Get in touch with us at info@domaniwealth.com or 855-855-5455!




 Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.


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