Advising The Business Owner Hot

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To avoid having all of one’s ‘‘eggs in one basket,’’ the business owner should continually set aside money for personal investments. Depending on the owner’s personal circumstances, these investments can be held in one or more of the following

·         Personal residence;

·         Taxable investment account;

·         Retirement account;

·         Life insurance policy and/or annuity.

A personal residence is ordinarily considered to be a personal asset, not an investment asset. However, in the case of a closely held business owner, the personal residence may be the first and most significant investment owned outside of the business. The equity build-up inside of a personal residence may turn out to be a significant element of personal net worth.

Once the closely held business owner has purchased a home and a cushion of liquidity is established, the next step is generally building up a taxable investment account. As cash is received through business profit and outside sources (such as inheritances or gifts), the business owner should establish an investment account to build personal financial security, diversification, and retirement savings.

Of course, another method of accumulating tax-advantaged retirement savings is through the use of a qualified retirement plan, IRA, or SEP-IRA. The business, or the business owner, will receive a tax deduction for contributions to the retirement account, while the account accumulates earnings on a tax-deferred basis.

If taxable investment accounts have built up and retirement contributions are maximized each year, consideration should be given to saving money inside a life insurance policy. Because life insurance is generally a necessity for the closely held business owner, a policy offering an investment element can provide an additional means of tax-advantaged savings.

Last, an annuity can also be utilized as a tax-advantaged savings vehicle. Although funds contributed to an annuity contract are not deductible, earnings inside the annuity are tax-deferred and ultimate distributions are partially non-taxable.

Because of the high level of risk inherent in the business investment, the owner’s outside investments should be somewhat more conservative than those of a non-business owner. This strategy is often difficult for a business owner to accept, since the entrepreneurial personality tends to be more risk tolerant than the average investor. However, economic factors that cause equity investment values to decline, such as recession or political unrest, may have an even greater effect on the closely held business. Thus, an over-concentration in higher-risk equity investments could be financially detrimental for the business owner.


Convincing the business owner to hire an independent investment advisor to manage his or her investments can be difficult. The entrepreneurial personality tends to want to directly control all of his or her own financial matters.  The advisor should remind that business owner that he or she likely does not have the time or the expertise to properly manage his or her own investment portfolio. Therefore, a ‘‘do it yourself’’ mentality could prove to be counterproductive in the long run.


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