Financial Planning for Business Owners in Texas


Portrait of a confident senior business owner posing with an apron on in his coffee shopThere are a lot of hats to wear when you own a small business in Texas. There is a good chance you are an exceptionally busy person and the business takes most of your time. This also makes it easy to defer decisions about your financial life while you are still active in the business. 

That should not justify putting off your financial planning needs to a future date. In fact, the more complex your business life is, the more important your financial life may be. All of these conditions become more important as you approach your retirement years. Do you sell the business? Does a family member continue to run the business? Does the business end up in your estate? What about taxes? These are a lot of moving parts and a lot to consider for your retirement years. 

Selling your business? According to reports, roughly 50 percent of small businesses fail before five years. Simply put, the buyers are not as motivated or skilled as the sellers.

There is another consideration. It is all too easy to focus on revenue, expense, and profit while ignoring other factors that impact your financial well-being. At the top of the list is a retirement plan after you sell the business.  

While managing revenue and expenses are certainly important for a successful business, financial planning encompasses so much more. For example, the business may have afforded you an affluent lifestyle. Will the sale generate enough income to fund the same lifestyle? Will it last for the next 30 years? Do you have a solution for healthcare costs late in life?

The team at PAX Financial Group, located in San Antonio, Texas, has created this guide to specifically help busy business owners in Texas and beyond create a comprehensive financial plan that includes early retirement years.

Chapter 1

Every Business is Impacted by Inflation

inflation www.paxfinancialgroup.comIt’s important to position your business firmly within its sector (restaurant, furniture store, construction company) and the economic circumstances that impact it. Yes, every business can be somewhat unique. But, economics can impact all of the businesses in a particular sector. For example, rising food costs and labor impact the cost of doing business for all of the restaurants in that sector.

Some sectors of the economy have chronically low-profit margins due to locations, competition, suppliers, etc. Some businesses are sustainable with low margins and others are not. It takes a lot of discipline to run a low-margin business. If this describes your business then planning for retirement may be even more important - low margins mean low savings. 

Other businesses, such as real estate brokers, are focused on big-ticket, discretionary items that people buy occasionally. Margins can be more robust, but financials need to be monitored to ensure a steady flow of new listings. Once again you want to make sure there is a plan in place, so when you are ready to retire there is a plan in place.

Each sector and type of business has Key Performance Indicators (KPIs). Are your KPIs gross profit margin, net margin, foot traffic, cash flow, quality of customer experience, or some other factor? Being aware of important KPIs at all times is critical.

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Chapter 2

Family-Run Businesses

family business www.paxfinancialgroup.comIf yours is a family-owned business, it’s important to make key decisions that benefit you, the business, and other family members (a son or several siblings).

What role will your family members have in the business? Is there a dominant family member that will take over your role (president, CEO)? What other roles will they fill?  Do they have strong relationships with each other? Do you have a succession plan for family members?

Consider the following best practices for successful businesses.

First, make sure you create clear roles and lines of authority for all family members.

Second, a clear chain of command should facilitate decision-making for the business. Do you want a committee running the business? If the president/CEO/leader makes a business decision, it needs to be supported just like it would be if you were still there. Don’t let family members persuade you otherwise.

Third, recognize that the business and the family may have separate goals. For example, none of them may be as motivated as you were at the same age. Suffice it to say many millennials are seeking more balanced lifestyles. They prefer 9-5 jobs, four-day work weeks, and 30 day vacations.

Fourth, many families are run by informal hierarchies. Emotional ties may be more important than business connections. Notwithstanding the connections, an underperforming family member still has to be dealt with. It may be uncomfortable but it has to be done.

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Chapter 3

Minimizing Taxes for Future Generations

Business owners tend to have a lot of responsibilities, but unless there is an in-house CFO, managing tax liabilities may not be one of them. It should be outsourced to outside planning and tax specialists. 

There is a continuous need for active tax management to minimize payments and avoid potential fines. There are also numerous regulations that impact the accumulation of assets for retirement. In both cases, the owner will need specialized expertise to guide decision-making. 

The need for tax advice impacts the business and the owner. If tax is not your area of expertise, you should work with a specialized professional who can help you achieve your goals, while minimizing taxes and other expenses. 

It is fair to say taxation is one of the most complex areas of business life and one that changes more often than it should. Taxes can vary depending on your type of business, location, and size. There are business and personal taxes to be dealt with. 

Not only that, but federal, state and local authorities are changing tax regulations frequently enough that few business owners can keep on top of all of them completely. Consequently, they work with specialized experts who know their businesses.

Business owners are subject to so many different types of taxation it is simply mind-boggling. No wonder they hire specialists to do the work for them. Required taxes can include income taxes for the business (separate from your personal income tax), sales tax, property tax, payroll taxes for employees (Social Security, Medicare, and unemployment insurance), and possibly a self-employment tax. Some types of businesses may be required to pay excise taxes, franchise taxes, taxes on gross receipts, and taxes on dividends.

Professionals help you minimize your taxes by paying attention to allowable tax deductions, depreciation schedules for equipment and other purchases, tax-advantaged retirement plans for employees (see next section), choosing employee benefits wisely,  and even the structure of their businesses.

Limited Liability Companies (LLCs), for example, pass your company’s income through to the taxes of the individual owners, which can make your taxes lower than they would be in other corporate structures, such as an S Corporation. LLCs can also potentially pay less in the Social Security and Medicare portions of their payroll taxes.

If you’re a family business, hiring close family members can reap tax gains as well. You do not have to pay the unemployment tax of a spouse, for example, payroll taxes on a child who works for the business can be reduced.

It’s also important to be aware of when all these taxes are due, of course. Employed individuals only have to be concerned about April 15, but that doesn’t apply to businesses. Income and many other taxes are due quarterly, and payroll taxes must be paid continuously. Failing to pay on time can subject you to steep fines from the IRS.

Chapter 4

Company-Sponsored Retirement Plans

retirement plan www.paxfinancialgroup.comCompany-sponsored retirement plans, such as 401(k)s, offer multiple benefits to business owners.

First, they are highly prized by employees who are thinking long-term. Plans such as 401(k)s offer pre-tax contributions, which lower employees’ overall tax burdens. The contributions and any market appreciation also grow tax-free over the years, until they are withdrawn at retirement. Your employees are likely aware of the need to save for their own retirement and not rely solely on Social Security.

Offering a popular benefit such as tax-advantaged retirement plans can also help you hire and retain key employees. Higher quality employees are more likely to be attracted to, and stay with, a firm with a retirement benefit than one without. A higher rate of retention has the potential to lower hiring and training expenses.

Second, these plans not only have tax advantages for your employees, but they offer tax advantages to your business. Tax-advantaged plans, such as 401(k)s, can provide tax deductions both for the business and for you as a business owner if you contribute to the plan(in your role as an employee of the company).

Finally, a wide spectrum of tax-advantaged plans other than 401(k)s are available to small businesses as well, and they may even allow a higher level of tax-deductible contributions per year than 401(k)s or Individual Retirement Accounts (IRAs). 

Some of these plans also allow cash flow strategies that can be very advantageous. In choosing company-sponsored retirement plans, it’s important to keep the size of your company, its cash flow needs, and your goals firmly in mind.

Talk with a fiduciary financial advisor, such as PAX Financial Group, to clearly understand your options.

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Chapter 5

Liability Concerns

It’s wise for business owners to protect themselves and their businesses against multiple liabilities on a variety of fronts. This is the foundation of risk management services. Remember, just because you’ve personally done nothing wrong is no protection against someone (or another organization) telling a court that you have.

Take care to avoid any comments or actions that could be seen as a conflict of interest or cause for legal action. This includes comments or actions against individuals, other companies, or government officials.

Set up liability insurance for your business.

Talk to a corporate attorney to determine the benefits of incorporating your business to protect against personal liability for legal judgments and debts. If you are subject to a lawsuit by any entity, and the lawsuit is successful, your personal assets could be taken as part of any judgment against the business. If your business incurs debts it cannot pay, your personal assets can also be taken to pay the debt. This includes assets such as cash or stocks, houses, and vehicles.

Several different types of business structures, however, separate business from personal assets, including LLCs, Limited Liability Partnerships (LLPs), and corporations, such as S corporations and C corporations. Your company becomes legally separate from you.

It’s a good idea to discuss the best risk management structure for your business with a professional, because each type is associated with requirements for reporting, taxation and more.

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Chapter 6

Your Exit Plan

retirement exit plan www.paxfinancialgroup.comNo business owner lasts forever. However, it is fair to say, that some last a lot longer than others. At some point, you will likely find you no longer want to run your business or find the energy and motivation just aren’t there anymore.

An exit plan is a key part of financial planning. While you may not know your exit plan when you start your business, it’s important to formulate one along the way, because each plan comes with different tax considerations.

You may want family members to run the business, for example. But you will need to consider the emotions involved. Don’t run the risk of rifts in the family based on who the successor(s) are or what type of control certain family members have. Discuss your plans fully and openly far before any final decisions are made.

You may choose to sell your business to a vetted third party. Consult professionals to make sure you maximize the sales price, benefits, and net proceeds. At the same time you want to minimize any drawbacks, for example, unnecessary taxes.

Finally, never let your exit be a complete surprise to family members, potential partners, or employees. Doing so can cause disruption to the business or cause harmful emotions to flare up. The best exit plan is a full disclosure, orderly one for everyone concerned.

Financial planning is complicated. Selling a business or transferring ownership is complicated. Put the two together and you can see the overlapping need for working with experienced experts.

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PAX Financial Group specializes in helping business owners with their unique financial needs. 

Schedule a no-obligation, 15-minute meeting with our team, and get the conversation started!

If you’re ready to get help with your finances and want to put a comprehensive plan in place, contact us to see how PAX Financial Group can help.

This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.

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