Financial Planning for Business Owners

The business as an asset

Three features separate a private business from everything else a family owns, and each one changes the planning.

• Concentration. For many owners the business is the largest share of their net worth, exposed to one industry, one region, often a handful of customers.
• Illiquidity. A sale can take six to twelve months in a good market, and longer in a weak one.
• Valuation uncertainty. A private business’ valuation can be a range, and the range moves with earnings, comparable transactions, the buyer pool, and general market and credit conditions.

Reserves, and where the owner is headed

Reserve needs typically run larger for a business owner than for a W-2 employee at the same net worth, and they exist in two places at once: the household and the business itself.

It is worth saying that a concentrated position in a business you understand is not automatically a problem to be solved. Some of the best investors we have met and studied are business owners whose portfolio is largely the assets inside a company they know well, delivering good returns for a long time. What matters is what the business earns on the capital in it and whether that can continue, the same question worth asking of any holding.

Past that, the right structure depends on where the business owner is headed, and the two common directions pull opposite ways. An owner planning to exit within a decade is usually building transferable value and moving cash toward the household. That favors clean books, earnings that do not depend on the owner, and wealth accumulating outside the business. An owner planning to hold for decades, or to pass the business to the next generation, may prefer to keep capital working inside it and plan around the cost of taking it out later. Those two paths point toward different entity structures, different compensation, different retirement plans, and different investments outside the business.

Entity structure and compensation

Entity selection and how the owner is paid are among the questions we get asked most. They interact with payroll taxes, the qualified business income deduction, retirement plan capacity, and basis.

For an S corporation owner, the split between W-2 wages and distributions is the central lever. Wages carry payroll tax; distributions generally do not. That pushes toward a lower salary. Pushing back is the requirement that an owner-employee take reasonable compensation for the work they actually do. In practice that means a salary supported by what someone else would be paid for the same role, in the same industry, at the same size of business. That support should be assembled from comparable-role data and filed.

Three more considerations:

• Retirement plan capacity. Contributions to a company plan are calculated from W-2 wages, not from profit or distributions. For an S corporation, the employer contribution is generally limited to 25% of wages, so an owner who takes $80,000 of salary and $220,000 of distributions has built a $300,000 year with only $80,000 of it to use as the base of the retirement plan contribution calculation. The salary chosen to reduce payroll tax also sets the ceiling on what can be sheltered.
• The qualified business income deduction (Section 199A). A deduction of up to 20% of qualified business income. Three cases: below the income thresholds, most owners get it regardless of wages. Above the thresholds, a specified service business, which includes most professional practices, loses it entirely. Above the thresholds and not a service business, the deduction is capped at roughly half the W-2 wages the business pays, so paying too little in wages can shrink it. Raising salary helps only in that third case.
• Basis. Basis is your investment in the company for tax purposes. It rises with what you contribute and with profits the company earns, and falls with losses and distributions taken out. It matters in two ways. A loss is generally deductible only to the extent of basis, so an owner can have a real economic loss and no deduction for it in that year. And distributions taken beyond basis can become taxable rather than tax-free returns of capital. Basis is tracked by the CPA, and the decisions that move it are made during the year, not at filing.

Current thresholds are in The Tax Numbers.

The salary that minimizes payroll tax also caps the retirement plan

The instinct is to set as low a salary as is defensible, but there are tradeoffs to that. For an S corporation with no employees, the employee deferral is a fixed dollar limit, or 100% of compensation if that is lower, while the employer contribution is limited to 25% of W-2 wages. So the salary decision and the retirement plan decision are the same decision.

Take an owner under 50 with $300,000 of business profit and no employees, using 2026 figures.

Raising the salary from $120,000 to $190,000 moves $17,500 into the retirement plan and costs about $5,100 in additional tax, and take-home dollars fall by roughly $22,600 because that money went into the plan instead of the checking account. It is still the owner’s money; it is just no longer spendable this year. Over twenty years the difference in what gets contributed is $350,000, before anything those contributions earn. Early in a career, cash for a house or a growing family can matter more than the deferral. Later, with the house bought and the practice established, the deferral usually wins. The useful version of this conversation compares take-home pay, total tax, long-term wealth, and when retirement becomes possible, run on real numbers rather than a rule of thumb.

We model this: what the current structure costs, what a different split does to payroll tax, plan contributions, the 199A deduction, and household cash flow. We bring the numbers and a recommendation. Then it goes to your CPA, who knows your filings and may see it differently.

Separately, real estate used by the business is often better held in a separate entity and leased to the operating company. That separates the appreciating asset from the operating risk, creates a rent stream that continues after a sale, and gives the owner something to keep when the business is sold. It also adds a related-party arrangement that has to be documented at arm’s length.

Retirement plan selection

A business owner chooses the plan rather than being handed one, and the range runs from a few thousand dollars a year to well into six figures.

Three things about the menu are worth knowing. The solo 401(k) beats a SEP at the same salary, because the deferral is a dollar amount rather than a percentage: on a $100,000 salary in 2026, a SEP allows about $25,000 and a solo 401(k) about $49,500. Adding employees changes the question from how much the owner can defer to how much of the company contribution can be directed toward the owner, which is what new comparability allocation does when the ages and the census support it. And a cash balance pension is the option that lets a high-earning business owner put away far more than any 401(k) allows, often well into six figures, because an actuary sets the contribution from age, compensation, and a target benefit rather than from a flat limit. The obligation is funded on a schedule that does not pause in a weak year, so it fits steady profits and not volatile ones.

The plans with the largest owner capacity also carry the largest required contributions for employees, which is a real cost and sometimes a deliberate retention tool. Current limits are in The Tax Numbers. The right answer at five employees is rarely the right answer at twenty-five, so a plan left alone for a decade is worth re-examining.

Risk management for an owner

Some of what threatens a business owner’s wealth is not market risk and cannot be diversified away. It gets transferred, insured, or documented.

• Key-person dependence. A business that cannot operate without the owner is a risk to the family while it is held, and often a discount to the price at sale. Reducing it takes years and raises the eventual price.
• Buy-sell agreement. Sets what happens to an ownership interest on death, disability, retirement, or a partner leaving. Two structures: in a cross-purchase the surviving owners buy the interest and generally get a basis increase in what they buy; in an entity redemption the company buys it, which is simpler and generally gives the survivors no basis increase. Valuation method and trigger definitions belong in the document.
• Funding for that agreement. Commonly life and disability insurance. An agreement without a funding source describes an obligation nobody can meet. The firm is affiliated with an insurance agency, disclosed below.
• Disability coverage. Sized to what the owner actually earns, which is not always the salary set for tax reasons.
• Liability. General coverage plus an umbrella, and for a business with staff, employment practices exposure that a general policy may not cover.

Planning before a transaction

Some business owners sell. Some never do, and transfer the business to family, to employees, or wind it down instead. Both paths have planning considerations and can be optimized.

• Planning to sell. Build value that transfers to a buyer: earnings that do not depend on the owner, a management layer, less customer concentration, financial records a buyer can verify, and contracts and leases that survive a change of control. Then the pre-transaction items below.
• Planning to hold. Build continuity rather than a business that is ready to sell: who runs it next and whether they want to, how a transfer to family or employees gets funded, how ownership and control get separated between heirs who work in the business and heirs who do not, and how the value gets taxed at death when there is no sale to pay the bill.

The rest of this section applies when a sale is a real possibility, even a distant one.

Several of the highest-value moves must be completed before a binding agreement to sell exists. Gifts of business interests to family or trusts, and charitable transfers of interests, generally have to happen before the sale is locked in. Transfer afterward and the IRS may treat the seller as having made the sale anyway, under the assignment-of-income doctrine, which can collapse the benefit. Valuation discounts for lack of marketability and control can also become hard to support once a price has been negotiated.

Structure can drive the tax more than the headline price does.

• Asset sale. Usually the buyer’s preference. The price is allocated across asset classes, and the portions allocated to equipment and depreciated real property can trigger depreciation recapture taxed at ordinary rates or at 25%, generally in the year of sale even when proceeds arrive over time.
• Stock sale. Usually the seller’s preference. Generally capital gain, but the buyer receives no step-up, and the price typically accounts for that.
• Installment sale. Spreads gain recognition across years and makes the seller a lender to the buyer, subject to the buyer’s continued performance.

Two provisions require advance positioning:

• Section 1202, qualified small business stock. Stock in a qualifying C corporation may receive favorable treatment, subject to holding-period and company-size requirements. The rules were modified by 2025 legislation, so current terms should be confirmed rather than assumed.
• Section 6166. Where an estate is large and illiquid, estate tax attributable to a closely held business may be payable in installments, which is one reason the estate structure and the business structure get reviewed together. Estate Planning When the Estate Is Large covers the transfer-tax side.

After a sale the tax pattern inverts. Sale-year income is a one-year peak, and the years that follow, before Social Security and required minimum distributions begin, are often the lowest-bracket window a family will have. Planning for Taxes covers that sequence. The proceeds then become a portfolio problem with an unusual feature: wealth that was concentrated, illiquid, and under the owner’s control becomes liquid, diversified, and priced by a market every day.

One question has nothing to do with tax. What does an ordinary Tuesday look like two years after the sale? An owner who cannot answer may still be ready to sell. Being ready to be done is a separate question.

Where this lands

For business owners, one asset sits at the center. Planning around it is important and includes entity selection, what and how the business pays you, retirement plans, agreements, and exit planning or the decision not to exit. Each of those has more depth behind it than one article can hold.