Financial Challenges of Business Owners and How to Navigate Them

On top of running a successful company, business owners face personal financial challenges, from cash flow management and tax optimization to retirement planning and using effective wealth management strategies. These hurdles can impact personal wealth management and overall financial well-being, so understanding how to navigate them is essential.  

Quick facts:

• Business owners face financial challenges associated with high incomes, increased liability and other factors.  
• Tax optimization, succession planning, retirement readiness and wealth protection are key considerations in successful business owner financial planning.  
• Wealth management strategies tailored to business owners can help protect assets and preserve wealth for the next generation.  

Understanding common financial challenges

Two key financial challenges unique to business owners are choosing the best business entity structure and minimizing tax liabilities.  

Business entity structures    

The structure of a business entity significantly affects your taxes and liability, shaping how you manage your finances and legal obligations. Here's a breakdown of common business structures:¹

Taxes  

Business owners face complex tax situations due to their dual role as employer and employee. Depending on the business type, you might pay self-employment taxes (15.3% for Social Security and Medicare) and make quarterly estimated tax payments. You may owe an underpayment penalty if you don't pay enough tax through estimated tax payments, but you can avoid the penalty by meeting the IRS's safe harbor guidelines:²  

• You owe less than $1,000 after subtracting your withholdings and credits.
• You pay at least 90% of the current year's tax obligation.
• You pay an amount equal to 100% or 110% (depending on your income) of the prior year's taxes.

You may also qualify for the qualified business income (QBI) deduction, also called the Section 199A deduction. This tax perk allows eligible business owners to deduct up to 20% of their QBI plus 20% of qualified REIT dividends.³ Only pass-through business entities are eligible, and you'll need to earn income as a business owner or partner – not as an employee – to claim the deduction.⁴  

Tax optimization strategies

Two ways business owners can optimize their tax situation are by maximizing deductions and planning for business income.  

Maximizing deductions

Business owners can optimize taxes by maximizing deductions to reduce taxable income. Common deductions include:  

• Business expenses (e.g., supplies, utilities, travel and marketing)
• Home office expenses  
• Vehicle expenses (mileage or actual vehicle-related costs)
• Depreciation  
• Health Insurance premiums
• Retirement plan contributions  
• QBI deduction
• Education costs
• Charitable contributions

Tax planning for business income  

The following strategies can help you manage income from business entities like LLCs and S-Corps:

• Salary and distributions: In S-Corps, you can pay a reasonable salary to reduce self-employment taxes, taking the remainder as tax-advantaged distributions.
• Income timing: You can defer or accelerate income and expenses to optimize your tax bracket.
• Retirement contributions: Contributions to SEP-IRAs, Solo 401(k)s and SIMPLE IRAs can help lower taxable income.
• Leverage the QBI deduction: Maximize the 20% QBI deduction if your income stays below phase-out thresholds.

Effective estate planning

Every adult with assets should have some level of estate planning to specify who gets what when they pass. As a business owner, you need an estate plan to minimize taxes, protect assets and provide clear instructions for wealth distribution. A solid plan can prevent disputes, secure financial stability and safeguard your legacy for family and stakeholders.

Estate tax implications:

Estate taxes can reduce the wealth your estate transfers to beneficiaries, potentially forcing the sale of assets (including your business) to cover tax liabilities. To mitigate these impacts, you can:

• Use lifetime gifts: Transfer assets during your lifetime to take advantage of the annual gift tax exclusion and lifetime exemption limits.
• Donate to charities: Charitable giving reduces your taxable estate while supporting causes that matter to you.  
• Invest in life insurance: An irrevocable life insurance trust (ILIT) can help cover estate taxes and other expenses after you pass.⁵  
• Business succession planning: You can transfer business interests at reduced tax values using a family limited partnership or valuation discounts.

Setting up trusts and other legal vehicles

Trusts are another estate planning tool that can help protect assets and ensure the smooth transfer of wealth. The type of trust you use depends on your situation, but some options include:  

• Revocable living trust: Ideal for maintaining control over the business during your lifetime and avoiding probate upon death.
• Irrevocable trust: Protects business assets from creditors, reduces estate taxes and ensures long-term wealth preservation.
• Grantor retained annuity trust (GRAT): Allows you to transfer appreciating business assets to heirs with minimal tax impact.
• Family trust: Useful for passing your business to family members while leveraging estate tax exemptions.
• Asset protection trust: Shields the business from lawsuits and creditors.
• Charitable remainder trust (CRT): Allows you to donate assets to charity and draw a yearly income for life.⁶

Strategic retirement planning

Business owners can build a robust nest egg by contributing to self-employed retirement plans and using alternative investment strategies.  

Maximize self-employed retirement plans  

Pensions and other retirement savings vehicles help ensure financial security in your post-work years. They enable you to save consistently while benefiting from tax advantages and building a steady income stream for retirement. Some options to consider include:

• SEP IRA: For small businesses or sole proprietors. Contributions are employer-funded and tax-deductible, with high contribution limits.
• SIMPLE IRA: For businesses with up to 100 employees. Employees and employers can contribute, and employer matching is required.
• Solo 401(k): For business owners with no employees. Allows high contribution limits, and owners can contribute as employees and employers.  
• Cash balance plan: For business owners with no employees. These accounts grow through employer contributions and guaranteed interest credits, with very high contribution limits.

Alternative investment strategies

Alternative assets offer higher potential returns than stocks, bonds and other traditional investments. Depending on your time horizon and risk tolerance, you might consider diversifying your portfolio with "alts" like:

• Collectibles
• Commodities
• Cryptocurrencies
• Hedge funds
• Private equity
• Real estate
• Venture capital

Wealth management strategies

Wealth management strategies help business owners protect and grow assets, provide tax efficiency (e.g., through tax-loss harvesting), plan for retirement and facilitate smooth business succession. A good strategy will align personal and business finances, ensuring business owners enjoy financial security, stability and a lasting legacy.

Diversification and asset allocation

Diversifying across and within asset classes, such as stocks, bonds, cash, and real estate, helps reduce investment risk by spreading your funds across different areas. If one investment underperforms, others that perform well can balance out losses. While it doesn't guarantee profits or protect entirely against losses, diversification can lessen the effects of market volatility, promoting more consistent growth over time.

Risk tolerance assessment

Understanding your risk tolerance is crucial to aligning your investment strategy with your financial goals, time horizon and comfort with market fluctuations. Knowing your risk capacity helps prevent emotional decisions and allows you to build a portfolio that balances growth and stability to reach your objectives with peace of mind.

Managing multiple benefit plans  

Business owners often juggle multiple benefit plans, including health savings accounts and retirement plans.  

Health savings accounts (HSAs)

HSAs provide tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. To maximize your HSA, contribute the maximum allowed, invest unused funds and consider covering current medical costs out of pocket to let the account grow. After age 65, you can use the funds for non-medical expenses, making HSAs a versatile long-term savings tool.

Retirement plans

• IRAs: High-income earners who can't contribute directly to a Roth IRA may be able to leverage a backdoor Roth IRA, converting nondeductible traditional IRA contributions into a Roth. Traditional IRAs accept contributions at any income level, though tax deduction eligibility phases out at higher incomes.
• SEP IRAs: A SEP plan is for self-employed individuals and small business owners. Employers contribute directly to employees' accounts (including their own) with high contribution limits and tax benefits.
• Solo 401(k)s: Designed for self-employed individuals with no employees (other than a spouse), the solo 401(k) allows contributions as both employer and employee, enabling higher savings limits and offering options for Roth contributions.

Business insurance needs  

Comprehensive insurance coverage is a must for business owners to protect against unexpected risks and ensure financial stability. It shields the business from potential liabilities, property damage, employee injuries and legal claims.

Business liability coverage

Liability insurance protects your personal assets by covering legal costs and damages from lawsuits. This prevents business claims from impacting your personal wealth.

Life and disability insurance

As a business owner, you should regularly assess your life and disability insurance needs, integrating coverage with estate and succession plans. Key person insurance protects the business, while own-occupation disability insurance ensures benefits if you can't perform your specific job. Be sure to update policies as circumstances change and consider bundling coverage to save costs.

Cash flow management

Effective cash flow management ensures liquidity to cover expenses, invest in growth and handle unexpected challenges.  

Proactive cash flow analysis

Business owners can manage cash flow by regularly analyzing income and expenses, identifying trends and creating accurate forecasts. By being proactive, you can better anticipate shortfalls, optimize spending and adjust for changes.  

• Leveraging credit lines and other financing options
• Businesses can manage short-term financing needs using various tools and strategies, such as:
• Business credit lines: Provides flexible access to funds for immediate needs like inventory or payroll.
• Short-term loans: Offers quick capital with fixed repayment terms for urgent expenses.
• Invoice financing: Advances cash against unpaid invoices to improve cash flow.
• Trade credit: Negotiating extended payment terms with suppliers to conserve cash.
• Credit cards: Useful for small, immediate purchases or expenses.

Succession planning

Succession planning prepares future leaders to fill key roles, preserving institutional knowledge and minimizing disruptions during transitions.  

Transition planning

Transition planning prepares a business for leadership shifts, ownership transfers and other changes to minimize disruptions. Planning involves assessing readiness, developing a strategy, engaging stakeholders, managing risks and transferring knowledge.  

Exit strategies

At some point, you'll need to sell your business or hand over control to the next leader. Developing an exit strategy starts with defining your personal and business goals, like financial security or legacy preservation. Evaluate your options, engage advisors for guidance and prepare the company for a smooth transition.  

Windfalls and unexpected income

If your business suddenly has larger-than-expected profits – or you sell the company for a tidy sum – you'll need a plan to manage taxes and make the most of that money.  

Tax implications of windfalls

Profits from selling a business are subject to capital gains taxes, and financial windfalls can push you into a higher tax bracket. To manage windfall tax obligations, consult a tax professional, make estimated payments and use tax-advantaged accounts or charitable donations to lower your taxable income.  

Investment strategies for additional capital

When invested wisely, a windfall can help ensure long-term financial stability. Consider using the funds to pay off high-interest debt, build an emergency fund and max out your retirement plan contributions. Any leftover money can go toward diversifying your investment portfolio, launching a new venture or charitable giving.  

Regular review and rebalancing

Regular financial reviews and portfolio rebalancing are essential for maximizing returns and keeping your financial plan aligned with changing priorities and market conditions.

Dynamic adjustments for market fluctuations

Market fluctuations can increase risk and reduce diversification. Rebalancing helps ensure your asset allocation aligns with your unique investor profile and goals.

Consulting with a financial advisor

As a business owner, you may not have the bandwidth to manage your finances effectively. A financial advisor can provide customized planning and investment services so you can stay focused on your business – and on track toward your goals.  

Tailored planning services

A financial advisor can help you align your personal and business financial goals by optimizing taxes, cash flow, retirement planning and investments. They can also help manage risks with insurance and contingency planning and grow wealth to ensure long-term stability for you and the business.  

Personalized investment strategies

A financial advisor can design an investment plan tailored to your specific goals, time horizon and risk tolerance. They can also monitor your portfolio, rebalancing as needed to keep your investment strategy on track to meet your objectives.

Bottom Line

Successful business owners face financial challenges related to high incomes, cash flow management, tax optimization, succession planning and more. As a busy business owner, managing your finances may feel overwhelming. A trusted financial advisor can provide expert guidance, helping you achieve long-term financial success and peace of mind. To find the right advisor for your unique needs, reach out to the Conway Wealth team at info@conwaywealthgroup.com or call 973.285.3640.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel.973-285-3600). 7486049.1

1. 1. U.S. Small Business Administration. “Choose a business structure.”  
2. 2. H&R Block. “How the safe harbor for estimated tax can help you avoid underpayment penalties.”  
3. 3. IRS. “Qualified business income deduction.”
4. 4. Intuit TurboTax. “What is the qualified business income deduction (QBI) & who qualifies?”
5. 5. Northwestern Mutual. “What is an irrevocable life insurance trust (ILIT)?”
6. 6. IRS. “Charitable remainder trusts.”  

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