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Business owners are often very focused on day-to-day planning for growth – and with good reason. But no matter what state you are at, whether you are just starting your business or you are starting to think about planning an exit, there are strategies and structures that can help you maximize value.  

In our experience of advising business owner clients in San Diego, we see three distinct phases where business owners can benefit from advice:  structuring their business, reducing income taxes and designing the key elements of an exit strategy.  

Forming a team of specialists to help navigate the unique tax, legal, and operational complexities of successfully managing a business can help you succeed, and our team at BWM offers resources to assist business owners in this regard. 

Setting Up Your Business: How to choose the right entity structure?  

The most common entity types are:  

  • Sole proprietorship 
  • Limited partnership (LP) 
  • Limited Liability Partnership (LLP) 
  • Limited Liability Company (LLC) 
  • C Corp 
  • S Corp

Establishing the correct entity structure up front is a significant part of legal and tax planning. The right structure can provide asset protection and can reduce taxes.   Determining the best legal structure for a business is not a straightforward exercise, and you should work with tax and legal advisors to decide the correct path.  We think about it in three main areas.  

Legal liability 

Business entity structures exist to create liability protection for the business owner and the underlying business.  Sole proprietorships offer no protection as the assets and liabilities of the business are not separate from the owner’s personal assets and the owner can be held personally liable. Limited partnerships are operated by a general partner with unlimited liability, and the remaining partners have limited liability.  A limited liability partnership, LLC or corporation offers limited liability to all partners or shareholders.  

Tax Implication

With a sole proprietor structure, the taxes from the business flow directly to the owners’ tax return.  The LP, LLP, and LLC are considered “pass-through entities”, meaning that all income flows to the partners’ personal tax return.  With corporations, it is more complicated; the C corp is a separate tax-paying entity and profits are taxed at the corporate level, before dividends are paid to shareholders, which are taxed on their personal tax return – this is commonly referred to as “double taxation”.  The advantage of the S corp is that the corporation can make an election to pass all income to the shareholders by completing IRS Form 2553.  Be sure to work with a tax advisor to ensure all required IRS forms are completed accurately.  


For low-risk businesses, a sole proprietor structure may be acceptable.  For more complex businesses, or those in which liability risks increase, the LP, LLP, and LLC or corporate structure are more common.  In general, businesses that have multiple owners, or service professionals like CPA’s and attorneys, will form a Limited Liability Partnership (LLP) or LLC structure. A corporate structure can be a great fit for higher-risk businesses and those businesses which seek to offer their shares to the public at some point, through an IPO. 

Up and Running: How to Reduce Taxable Income? 

There are a few solutions business owners can evaluate to reduce their tax footprint.  The following should be considered and discussed with an individual’s tax or legal advisors. 

Start a retirement plan 

There are many retirement plan options available for business owners to implement, and each structure has unique complexities that should be strategized one-on-one with tax and legal advisors.  But for clients whose businesses provide high, consistent income, it can be advantageous to open a defined-benefit plan.   

A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history.  We’ve helped many high-net-worth clients open these structures by working closely with a well-qualified third-party administrator (TPA) who will administer the plan.  The TPA will ask for an employee census which includes age, hire date, and salary info.  From there, they will be able to indicate how much the plan will cost (annual aggregate benefits to employees) and compare to the owner’s yearly tax-deductible contribution.   

If the savings from the annual tax deduction to the owner is significantly greater than the annual cost of the plan, it can be a great solution for both the employer, and the employees.  It can also be a great addition to an existing employee benefits package to drive loyalty and can be a helpful recruiting tool as well. All contributions, and investment earnings in your defined-benefit plan grow tax deferred but are taxed upon withdrawal after age 59 ½. 

Pay Attention to 199A Qualified Business Income Deduction 

Eligible taxpayers can deduct up to 20% of their Qualified Business Income for a passthrough entity, and it is available whether a business owner itemizes or takes the standard deduction*.  While there are complex rules around this deduction, it can make a meaningful difference to your after-tax profitMore information is available here  

Open a Health Savings Account (HSA) 

HSAs are  tax-advantaged accounts created to save for qualified medical expenses.  Contributions can be made to the account by the employer up to a maximum amount each year. The contributions are invested and can be used to pay for qualified medical expenses like medical, dental and vision care as well as prescription drugs. The advantage to the business owner is that no payroll taxes are required on HSA contributions deducted through payroll and businesses receive a federal income tax deduction on any contributions made to employee accounts. For more information on HSA’s please review our blog on the topic. 

Planning the Exit: Understanding the Key Elements and Timeline 

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Target exit date 

We have met many business owners who have not spent the required time on exit planning because they are simply too busy operating the business.  Sometimes, an owner will receive an unsolicited offer, and that is how a business might sell, but we recommend being much more intentional about an exit strategy.   

As part of operating your business you make forecasts and develop strategic plans all the time so why not spend the time to recognize and plan when the most optimal time would be to sell the business?  This is where we can help clients.  Utilizing our comprehensive tools, we help the client determine how much after-tax proceeds they would need to realize from the sale of the business to sustain their lifestyle.  If you run significant personal expenses through the business, such as a car, travel, cell phone, etc. it is important to account for these expenses in advance of a sale, so you truly understand your monthly out-of-pocket expenses.   Also, the more prepared you are to sell the business, the higher probability you will maximize its value upon exit.   

Over many years at BWM, we have developed a “virtual” team of trusted professionals (CPA’s, exit planning specialists, merger & acquisition (M&A) attorneys, investment bankers, etc.) that can help you understand what steps are needed to maximize the value of your business.  For example, one of the professionals is a specialist in P&L expense reduction.  An expense reduction can be pure profit to the bottom line.  If companies in your industry sell for a multiple of 5x EBITDA, a $200k expense reduction could equate to an extra $1,000,000 in proceeds from the sale. 

Is the transition to a key employee, family member, or third-party buyer? 

For many business owners, they may have all three of these transition options, or only one. If a key employee has an interest in taking over the business, and you deem them qualified to do so, a conversation should take place sooner than later.  The two most common transfer arrangements to a key employee are an installment sale purchase and leveraged management buyout.  With an installment sale purchase, generally, key employees will not have the financial resources to buy out the owner, so spreading the purchase price over 5-10 years can enable a key employee to buy the business.  The downside to the owner is if the key employee cannot effectively operate the company the owner may never receive the agreed upon sale proceeds.  

A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage.  The management team pools resources to acquire all or part of a business.  Funding usually comes from a combination of personal resources, private equity, and seller-financing.  

There are three ways to transfer ownership to a family member – a sale, partial sale, or gift.  With a sale to a family member, the owner will typically realize less proceeds than a sale to a third party.  A partial sale will allow the owner to stay involved in the business, perhaps as a majority owner, but even as a minority owner, the benefit is continued cash flow from the business in retirement.  For high-net-worth business owners that have a taxable estate over $11.7M if single, or $23.4M if married, in 2021, any estate value over those amounts will be taxed at a rate of 40%*.   

If a business owner does not need the assets from a traditional sale, they can gift all, or part of the business to a family member.  By doing so, the value of the asset, and its future growth, are removed from the estate and therefore not subject to estate taxes at the owner’s death, or surviving spouse’s death, if the owner is married.  

If a succession plan involving a key employee or family member is not an option, a sale to a third-party buyer may be the best alternative and could lead to a higher sale price than previously mentioned options.  Typically, a business owner will hire a business broker, or investment banker that has a specialty in the same industry.  The consultant will learn as much as they can about the company, build a custom “pitch” deck highlighting the key attributes of the company, and run a process whereby they solicit interest from potential buyers.  Ideally, there are multiple bidders which can generate a higher sales price.  Before signing an engagement with an investment banker, it is wise to hire an M&A attorney who will not only help you with the necessary legal documents to close the transaction but can help negotiate the terms of the engagement on your behalf and ensure the banker’s fees are reasonable. 

Defining the value of a financially successful exit. 

Imagine sitting at the table with a potential buyer and negotiating the sale of your business, without a clear understanding of the proceeds required, net of taxes, to support your family and achieve your future life goals.  Unfortunately, there are many occasions where this has happened, and this is another reason a business owner should assemble a team of advisors prior to exiting the business. However, even before determining the value required from the sale of the business, it is important to gain clarity on the most important intentions for one’s life – because your goals should ultimately be derived from these intentions.   

At BWM we have a tech-driven, measurable, and repeatable process that is very effective in uncovering the client’s most important intentions. For example, if the client’s intention is to spend more quality time with the people they care about, one possible goal might be to purchase a vacation home on a lake to share with family and friends. Another consideration is business owners spend significant time focused on the sale price of the business, but oftentimes not enough focus is spent optimizing the risk adjusted performance of the proceeds post-sale.  Make no mistake, it is a major change to monetize what is typically your largest asset whose estimated value may change once a year – or when appraised by a valuation expert, and then convert that asset to an investment portfolio which fluctuates daily.  

Oftentimes, volatility can lead investors into making rapid, emotional decisions with their portfolio.  At BWM we spend a great deal of time getting to know the client so we can help optimize their decisions around money. Part of that process is determining how emotions can drive decisions around finances and we engage the client in a short quiz called MoneyMind.  This exercise can help us uncover a client’s emotional trip wire when it comes to money, and therefore help the client avoid making poor decisions that could ultimately jeopardize their financial well-being after the sale of their company.  Once we know the client’s most important intentions, along with their dominant MoneyMind, we utilize Industry leading software to develop a custom tailored financial plan that specifically addresses how much is needed from the sale of the business, and incorporates specific goals based on the client’s most coveted intentions. 

If you would like assistance with any of the areas mentioned in this article, we invite you to sit down with us.  We will assess your current situation and communicate how we can leverage our experience, and relationships with subject matter experts, to better optimize your financial position – so you can live your best life! 

*Pending tax reforms would change these levels/options. 

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Investment advice offered through Stratos Wealth Partners, Ltd., a Registered Investment Advisor DBA BWM Financial.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.