FAQ #16 I run a home business / I am a busy entrepreneur. What is in personal financial planning for me?

As an entrepreneur, you must be used to taking risks. You probably prefer to rely more on yourself and envision your future more clearly and forcefully than many others who live off a salary. While you accept heightened uncertainties, it makes sense to try to balance it with enhanced keeping control of your essential assets and activities, irrespective of (but somewhat differently according to) which phase of building you enterprise you are at.

You probably need insurance protection even more than employed people, who usually have at least some coverage, against certain risks, from their employer. With the damage or loss of your most important asset, your earning power, you or your family may suffer painful, unbearable and/or irreparable harms financially. Moreover, if you have close associates or key employees, their loss of health or life can be similarly devastating to you as well. You should consider at least the following potential benefits of dealing with insurance:

In the past, being self-employed was a disadvantage when someone tried to get various kinds of insurance protection. This situation has been changing, however. Today, almost everyone can easily buy not only life insurance, but also very competitive income protection (disability insurance) and other living benefit plans, just like people in regular employment. Family extended health and dental care, and even business overhead protection are also available.

There are special individual or group insurance plans of various types built according to the unique needs and tax conditions of businesses, as well as certain strategies on how to use them for the most benefit of owners, partners, key employees and the workforce in general. Making premature decisions about them, often because of exaggerated reliance on accountants or others without proper training and information in this field, is a trap many fall into.

There are many planning issues for business owners related to taxation, diversification, and business succession. An easy-to-understand, still often committed mistake by entrepreneurs is that they turn back all their profit into their business. It’s akin to neglecting insurance protection, or putting everything on one card. While the entrepreneur (their vision, skills, perseverance, etc.) is probably the most important factor in the future success of the business, there are always many other (unpredictable, hard-to-manage, etc.) factors as well. Thinking over, and preparing strategies for, various scenarios can greatly improve the viability of the business. One of the risk management considerations is how to protect against creditors or professional liability claims. Typical ways of addressing this issue revolve around certain insurance products, beneficiary designations, ownership issues, holding companies, or various trusts.

Taxation issues are always on business people’s mind, and they often stir emotions. There are so many aspects of it that I’d emphasize only two things here: First, one can easily make the mistake of paying disproportionate attention to tax-savings, at the expense of other aspects, exactly because of the strong emotions associated with it. Second, instead of jumping to conclusions, it’s advisable to rely on various experts (planners, accountants, brokers, lawyers, tax-specialists, … sometimes all, at other times only a few of them) when dealing with these complex taxation issues.

Finally, planning can be important because of the usually complicated, multi-level relations between the family and the business side of our lives. Speculating about and planning consciously various aspects of this may save marriages, help and ensure continuation the business, prevent alienation by / among children, and strengthen cohesive and successful families in many other ways.