Originally published on Forbes.com
It often seems that personal finance advice given to business owners is the same advice given to employees.
The problem is that business owners have different kinds of assets, liabilities, cash flow demands, and tax structures than employees, and not taking these into account during traditional financial planning could mean significant oversights that could leave a business owner over-exposed in areas that could affect both their personal finances and their business; on the other hand, it could also mean overlooking some of the unique finance advantages that business owners have that could help them grow their business.
As a business owner, it’s worth a few minutes to asses a few critical areas of your personal and business finances to make sure you have these covered.
Enjoy the checklist, which has been reprinted below for your convenience. Or, you may read the original article over on Forbes.com.
Build the life you love,
In my experience, the typical “financial advisor” or retirement planner just doesn’t understand entrepreneurs or business owners. They’re used to the W-2 employee who is content to passively funnel money into 401(k)s and IRAs full of mutual funds.
But for the entrepreneur, there’s much more to personal finance than that. So here’s a personal finance checklist for entrepreneurial strategies your typical retirement planner probably won’t know to help you with.
Is your business structure sufficiently protecting you from liability and taxes?
Many financial planners work for a company and have never started a business, so they don’t know about the different business structures you can use to protect yourself from liability and taxes. For example, the most basic business entity that’s been around the longest is the sole-proprietorship. But it doesn’t provide any protection from liability or taxes.
I’ve helped hundreds of business owners switch to an S-Corp where they can often save tens of thousands of dollars on payroll taxes and add a layer of protection against personal liability, yet their financial advisor and sometimes even their CPA never even told them about the savings.
Are you using the 5,300+ pages of tax code written specifically for you?
The IRS tax code is more than 5,700 pages long by some counts. (Others say it’s 75,000+ pages, but they’re counting supporting documents like court case rulings, not just the tax code itself.)
The first 400 pages are written mostly for the typical tax return–a W-2 employee who contributes to retirement plans.
But the next 5,300 pages are mostly strategies for businesses to lower their taxes–it’s all about which deductions you can take and which strategies you can implement.
Do you know if you’re taking all of your legally allowed tax savings from these 5,300+ pages?
It’s unfortunate, but probably not. In my experience, 93% of business owners are paying more tax than they legally owe. Whether it’s forgetting to deduct the interest from business loans, not cost segregating the office they operate out of, paying business items on their personal credit card, not recording self-employed health insurance properly, or forgetting to write off business transportation taxes, missed deductions can add up fast.
Have you built a war chest to take advantage of opportunities and get through hard times?
A financial planner will often encourage you to start taking money out of the business to put into financial products before you’re financially set.
It’s smart to first build a “war chest” where you store cash in a way that’s immediately accessible when you need it. It can be as simple as a savings account.
Having this liquidity in your back pocket can either reward you greatly or save your business in the future.
For example, if the right business opportunity comes along, but it requires capital investment, you can pounce. Or if the business hits hard times, you won’t have to finance payroll on your American Express at 18% interest.
These rewards are likely to be much greater than what you’ll get taking money out of your business to invest in the markets.
Do you have all the insurance business owners need?
As a business owner, you face far more risk than the average person.
If you’re injured or become sick and can’t work, your business and livelihood is in danger. If someone gets hurt at your physical location, you could be liable. If an employee is running an errand and gets in an accident, you’re responsible.
Thankfully, with the added risk, you also have more opportunities to protect yourself. You can acquire overhead-expense insurance to pay the business’s bills while you’re unable to work, or even a comprehensive Business Owner Policy to provide property, liability, crime and medical coverage all-in-one package.
Do you know the 3 C’s to borrowing money under the best terms?
To borrow money under the best terms possible, you need to know the 3 C’s:
- cash flow
- and collateral
Having good credit is about more than just paying your bills on time. It’s also about having different types of credit, such as a mortgage, an installment loan (i.e. car loan) and credit cards. It’s also important to use less than 30% of your credit card limit. Just following these simple rules will help you maintain a high credit score.
Cash flow is important as well. As a business owner, you may have found it difficult to get a mortgage for a home in your price range. You have an incentive to minimize your taxable income, but banks look at your taxable income to see if you qualify for a loan. The lower the taxable income, the less you’ll be able to borrow.
Collateral is the third C, and it’s the reason why auto loans charge 2-5% interest when credit cards are charging 10-30% interest. If you default on an auto loan, the car acts as collateral. But if you default on a credit card, there’s nothing for the bank to repossess.
So putting up an asset as collateral is sometimes a great way to get a lower interest rate. You can use your house, your car, your life insurance or even your business as collateral to get better interest rates.
Are you able to get a business loan or line of credit if needed?
Your typical financial planner will tell you to avoid paying interest, so they may not even think to help make sure you have access to a business loan or line of credit. But having access to money really makes a difference if it will help you in a pinch or simply give you peace of mind that it’s there if needed.
On that note…
Are you regularly monitoring your business credit score?
Just like you personally have a credit score, your business can have a score that impacts access to money as well. And if you want to get a business loan, a line of credit or qualify for lower interest rates, then it’s critical that you monitor or build your business’ Dun and Bradstreet score to make sure it’s accurate.
It’s been reported that as many as 83% of personal credit reports have errors on them. And a quarter of those errors may be significant enough to deny you for a loan, even though you did nothing wrong. There’s no reason to believe business credit reports are any more accurate.
To check your personal credit reports, there are 3 main bureaus: Equifax, Experian and TransUnion.
There are 3 bureaus for business credit reports as well. But what your typical financial planner may not know is that it’s not the same three. The 3 bureaus for business credit reports are Equifax, Experian and, as mentioned above, Dun & Bradstreet.
Have you built a wealth team of specialists?
Most people, if they hire anyone at all to help with their finances, stick with a tax accountant or CPA. But lately I get just as much or more tax savings advice from my tax attorney as I do my CPA. Adding financial specialists to your wealth team is critical to success as your business grows.
On your wealth team, you may end up with a bookkeeper, a CPA, a tax attorney, a business attorney, an insurance specialist, a banker, a Registered Investment Advisor and more.
Do you have an estate plan in order?
It’s not pleasant to think about, but what happens if you’re not around anymore? Do you have a succession plan for your business?
An estate attorney can help you create a succession plan to direct the business after you’re gone and help you create buy-sell or cross-purchase agreements to sell your share of the business (if in a partnership) in case of your passing.
Do you have a retirement plan fit for an entrepreneur?
For most entrepreneurs, the best place to build wealth is inside their business. Bill Gates built his wealth inside Microsoft. Warren Buffett built his wealth inside Berkshire Hathaway. And it’s the same with Facebook’s Mark Zuckerberg and a string of other billionaires and millionaires.
Businesses are where wealth is built, not in 401(k)s or IRAs. So for many entrepreneurs it’s best to keep money inside of your business. This helps you build business equity if you ever want to sell for a large payday. Or you can use the money to hire more people to take over your day-to-day roles so you can retire in your business, rather than from your business.
As you can see, personal finance for entrepreneurs is a whole different animal. It demands a tailored financial plan that the typical retirement planner may not be prepared to deliver–simply because they’re not business owners.