Keeping an eye on your personal wealth is crucial for small business owners, especially during challenging economic times. Learn steps you can take to help balance your personal and business finances and achieve your long-term financial goals.
Managing your business’s cash and making the right financial decisions for your company is crucial for growth and long-term success. However, for many small business owners, focusing on your business finances alone is not enough. According to the Federal Reserve, 9 out of 10 small businesses rely on their owners’ personal finances to secure funding, and 56 percent have used money from friends and family to support their business in the last five years.¹
With personal and business finances so often connected for so many small business owners, concentrating on your personal financial health is key for running a successful business.
Understanding your business’s balance sheet is certainly important, but making key decisions for your company with an eye to your personal wealth can help you unlock your full growth potential and achieve your financial goals, for your business and for yourself.
Taking the necessary steps with your business to protect your personal wealth is important in any financial environment, but it’s an even greater priority in times of economic uncertainty. As business owners move forward in the second half of 2022, and into 2023, they are facing ongoing inflation, rising interest rates, and supply chain challenges among other key business concerns. This is the perfect time to evaluate your financial position and take steps to make your personal and business finances more secure.
Here are four tips to get started guarding your personal finances as a small business owner:
Do you have the proper business structure?
Starting out, many small business owners may use their own personal finances to fund their venture. In these early days, you may be more focused on getting your company off the ground than establishing the right business structure to protect your cash.
However, once you have a footing for your business, it’s time to think about building a legal structure around your company. Choosing the right business structure can provide protection against creditors who may come for your personal assets if something unexpected happens with the business.
For instance, if you funded a significant portion of a business by taking out a second mortgage on your home and interest rates rise, it may take more funds to pay back the loan. If your business is unable to pay back the loan in the high-rate environment, then the creditors could repossess your home.
Setting up a business structure that shields your personal assets from creditors can be a valuable first step toward balancing the needs of your business and your personal financial health. Once you have a business structure in place, you can more easily take out loans, establish retirement accounts, and build your credit, with an added layer of security for your personal finances.
Some common business structures include:
This is the default structure for new businesses with a single owner. It provides very limited protection for personal assets, and you have to rely heavily on personal information to obtain a loan. Since the owner is indistinguishable from the business, they are personally liable for all of the debt.
Limited liability company (LLC)
This structure reduces the potential liability that you might face from your business. It’s flexible, in that it can have multiple owners, and it also requires less paperwork and management than other structures.
An S-Corp is another business structure available to small business owners. Sharing key similarities with an LLC, this setup provides strong protection against liability, while still allowing you to avoid the double taxation required at the business and personal level in a C-Corp, a business structure common among larger corporations. The S-Corp model can be a powerful structure as your business grows larger and your personal finances require additional protection, but it can be more challenging to set up and less flexible than an LLC.
There are many factors that go into selecting a business structure, but making the right choice for your business can be a powerful way to secure your personal wealth. Talk to your attorneys and financial advisors about which business structure could align with your financial goals.
Protect against the unknown
As a small business owner, the success of your company relies on your ability to work. However, unforeseen challenges may arise that limit your ability to run your company, either temporarily or in the long term, and it’s important to have a contingency plan in place that guards against circumstances outside of your control.
There are several strategies that business owners can use to protect their financial health in the face of uncertainty, both at the personal and company levels. For example, you can purchase long-term disability insurance through your business or a personal account. Having a plan in place that will still pay you and help you meet your financial obligations even if you can no longer work will give you piece of mind that your finances are secure, even if you experience an accident that interrupts your business operations.
You can also take steps to insure your business against potential lawsuits. Whether you work with customers or other businesses, having business and liability protection ensures that your company can still function when facing litigation—and pay out any damages that may follow. In the current economic environment, supply chain shortages can lead to potential disputes between suppliers, manufacturers, and sellers. Just like your business structure, having the right insurance policies in place can protect your personal wealth from issues that emerge within your business.
Keep more of what you make
Another important strategy to consider is how you manage your business profits. Reinvesting the money you earn into your business can be a great way to stimulate new growth. But don’t forget to keep your long-term financial goals in mind.
The rising inflationary environment we face today highlights the importance of having invested funds for the future. Using profits from your business to fund a retirement plan is a great way to make your business work for you and can pay off down the road. There are several different retirement plans that business owners can leverage, and many of them allow small business owners to invest up to $61,000 a year for 2022, between personal and company contributions. This money goes in tax deferred—so you don’t pay taxes until you distribute funds in retirement.
Whether you select a 401(k), an SEP IRA, or another plan that aligns with your financial goals, using business funds to contribute to your retirement plan is a powerful method to invest more and save on taxes.
Talk it over
Finally, when considering the best ways that you can protect your personal wealth as a small business owner, one of the most important steps is also one of the simplest: make sure you’re maintaining a regular dialogue with your financial advisor or banking partner. Balancing personal and business finances is a complex topic—choosing the right business structure, the right insurance for your company, and the retirement plan that fits most closely with your long-term financial vision can be overwhelming.
You don’t have to do it all yourself as a business owner. Having a trusted financial advisor that you can discuss these questions with will pay dividends for you and your business. They’ll listen to your concerns and keep your personal and professional goals in mind. They can help you understand all of the options available to your business, and they’ll work with you to put together a plan that meets your financial needs, today and in the future.
Ready to discuss more ways you can manage your personal and business finances and achieve your long-term financial goals? We’re here to help. Schedule an appointment with a Santander banker today.
1. Federal Reserve Banks. “Small Business Credit Survey: 2020 Report on Employer Firms.”
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