Financial Planning for Small Businesses - image of successful architect in his small office with assistant in the background

Financial Planning for Small Businesses – how many hats are you wearing?

Being a business owner these days is difficult to say the least. Small business owners often wear many hats. They are lead salesperson, head of human resources, accountant, and many other things all rolled up into one. Most people continue to juggle these roles for many years. At some point, however, businesses grow and some of this work must be trusted to other professionals. This is especially true when it comes to financial planning for small businesses.

Financial planners are especially helpful when it comes to helping business owners establish retirement plans, prepare for the sale of a business, or look for proper insurance for estate planning.

Should I set up a retirement plan for my business?

At some point, most successful small business owners start to think about establishing a retirement plan for their business. This is simply part of the equation when it comes to financial planning for small businesses. Offering a retirement plan can help make your business attractive to potential employees, provide tax relief to the business as a whole, and help you and your employees save for the future. Many people get overwhelmed, however, when they start to look into how to go about setting up a plan.

“The truth of the matter is that setting up a retirement plan for your business can be tricky. There are several different kinds of plans and not all of them will be right for your business. While this can be daunting it also means that there is likely a plan type that fits well with your particular situation.”

How do you retain good employees?

We talked about how many hats you wear in order to run your business, but what about your valuable employees? Productive employees are hard to find and when you encounter a good fit, it makes sense to retain them using a retirement plan that fits your company.

“Profit sharing plans and other retirement plans that offer a company match can be good options to retain and encourage employees to stick with you for the long run.” 

How do I know which type of retirement plan to pick?

So how do you tell which kind of retirement plan to set up for your business? Often the first step is to sit down with a financial advisor. They’ll ask you about your business and then walk you through the options that make sense for you. Depending on your needs you’ll likely want to set up one of five different types of retirement plans; a Solo 401k, a Simple 401k, A Sep IRA, Simple IRA, or a profit sharing plan.

Financial Planning for Small Businesses - infographic describing basis features of solo 401k, sep IRA, simple 401k, simple IRA, profit sharing plan

What is a Solo 401k and is it right for you?

There are a lot of good things about being your own boss in a very small business. One downside, however, is that you don’t get to participate in an employer-sponsored 401k. This is where the solo 401k comes in.

Solo 401k accounts are specifically for self-employed people and your business must have no employees other than you and your spouse. In a solo-401k plan you play the part of both the employee and the employer when it comes to contributions. As far as taxes go, you can choose to make your contributions pre-tax or after-tax.

“Overall, the solo 401k can be a great fit for the self-employed business person. It’s fairly flexible, has relatively high contribution limits, you can take loans from it, and it’s easy to set up.”

What is a Sep IRA and is it right for you?

A Sep IRA is another option that can work well for those who are self-employed and who have no other employees.

The reason they work best for people who don’t have employees is because you are required to contribute the same percentage to your employees as you do to yourself. So if you put 25% of your compensation into your Sep IRA account you would also have to put 25% of each employee’s pay into their Sep IRA accounts. As much as you might like to contribute a lot toward your employees’ retirement, this is simply too expensive for more business owners.

“If you don’t have employees, Sep IRAs can be attractive because they have higher contribution limits than other solo 401k or regular IRA accounts, they are fairly easy to set up, and there are possible tax advantages.”

What is a Simple 401k and is it right for you?

A simple 401k is designed for
small businesses that have employees but not too many. For a simple 401k you
can have up to 100 employees and the plan can be made available to all
employees who make at least $5,000 a year.

As the employer under a simple
401k you will generally match your employee’s contributions up to a certain
amount. For tax purposes contributions are made pre-tax.

“Set-up for a simple 401k is a bit more complicated but can easily be handled with the right professional guiding you.”  

What is a Simple IRA and is right for you?

A simple IRA is very similar to a
simple 401k in many ways. Like the simple 401k it’s meant for small businesses
with fewer than 100 employees and it requires the employers to make matching
contributions.

The key difference between simple 401ks and simple IRAs is that simple 401ks have a loan feature and simple 401ks don’t. This means that your employees would have the option of taking a loan from their simple 401k that they would not have with their simple IRA. In general, it’s also easier to set up a simple IRA than it is to set up a simple 401k.

What about profit sharing?

Profit sharing plans are a lot like 401k plans. The
difference is that the employer has more flexibility in how much they
contribute to their employees’ accounts. In a regular 401k retirement plan, the
employer agrees to match a specific percentage of employee contributions
regardless of how well the business does as a whole. With a profit sharing plan
the employer can choose how much to contribute based on how well the business
is doing.

Another important distinction is that in a regular 401k only
employees who contribute from their own paychecks receive any employer
contributions. With a profit sharing plan, even employees who don’t’ save
towards retirement can receive employer contributions.

“Profit sharing plans can be a nice option for employers who want more flexibility in how much they contribute to their employees’ retirement. Like a 401k, set up can be a bit more complicated, but can go quite smoothly with some professional help.”

Are you actually prepared for the sale of your business?

This is not a question many people like to think about when they consider financial planning for small businesses. Unfortunately, it’s one of those things that needs to be addressed in successful financial planning for small businesses. Business owners who pass away suddenly often leave quite a puzzle for their heirs.

Family members who may have been completely uninvolved with
the daily operations of your business may suddenly have to take on everything.
This is where insurance comes in. Whether your heirs want to take on the
business themselves or sell it there are different insurance options that can help
make their lives easier. If set up correctly life insurance policies can be
used to replace any income you used to make and cover any debts that the
business might have had at the time of your passing.

“A financial advisor can help you figure out exactly how much insurance you need depending on the particulars of your business. They can also help you make sure you are getting the best price on that insurance as possible.”

Why not schedule a phone call with us?

Whether you’re looking to set up a retirement plan for your business, thinking about selling, or worrying that you don’t have enough life insurance to cover business debts if you pass away we are here to help.

We won’t charge you anything and we don’t require a further commitment from you. We’ll simply ask you some basic questions and help point you towards the business solutions you need.

If you want to continue on with us after that and let us help you set up a plan or insurance policy, great! If not, we’re happy to have helped you in even a small way on the path to success.

Providing excellent financial planning for small businesses is one of our favorite parts of our work here at Financial Truths and Vector Financial Solutions and we look forward to talking with you.

Ready to Book a Call?


David Wilson, writer at Financial Truths, is also a financial advisor and Certified Financial Planner® at Vector Financial Solutions, Inc. Vector Financial Solutions is located at 139 E. 3rd Ave., Escondido, CA 92025 and by phone at 760-741-3159. He serves clients throughout the U.S. as well as those in Escondido, San Marcos, Rancho Bernardo, Poway, 4s Ranch, Rancho and Santa Fe, California.

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